The Flying Frisby
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Why You Should Own Stocks Now

Why You Should Own Stocks Now

November to January: good times for the S&P500

Good morning to you from sunny California, where I am visiting my dear mother.

If you missed them last week:

Today, though, it’s the stock market. We think it’s going up. Now could be the time to invest. Here’s why …

The tricky month of October, the month of choice for the stock market crash, is now behind us. There was a wobble. A very wobbly wobble. But the blob held. The stage is now set for a juicy rally into year end.

November to January is, historically, the best three month period of the year for the S&P500, the index of the largest 500 companies in America, while November to April is the best six month period. We are at the beginning of that run.

If you bought the Dow Jones Industrial Average on November 1 every year since 1950 and sold it six months later on April 30, a ten grand stake would now be $1.2 million, give or take. 

But if you did the reverse and bought the Dow on May 1st and sold it on October 31, you would barely be at breakeven. That is some difference, particularly when you add currency deprecation into the mix. One option gives you breakeven over 73 years, less inflation, the other option gives you $1.2 million. 

Don’t ask me to explain why this is. It might be some kind of self-perpetuating, herd mentality thing. It might just be that different people do different things at different times of the year. I swim more in summer, for example. (I know that sounds trite, but you take my point). 

But there is more.

This is the third year of the four-year US Presidential Cycle. It might be because the powers that be are trying to get everything looking hunky dory in time for the next election. It might just be one of those things. But third years are very good years for stocks, the years in which the strongest gains come - one of the reasons I was arguing in January that this would be a good year for stocks. This year has been particularly good, especially in the Nasdaq - I gather it had one of its best first six months ever. 

In 2019, President Donald Trump’s third year, there was a 27% rally in the S&P500. Prior to that, from 1933 to 2015, the average gains have been 16%, compared to 6% for the other three years. 

That November-to-April run is even stronger in the third year of the US Presidential cycle.  

We are at the most bullish time of year in the most bullish year. The portents are good. 

It may not feel that way after the October we have just had. October, is almost always the most volatile month. Octobers are often so horrible that nobody wants to buy. That in itself is almost reason to buy. “Buy when you don’t want to, sell when you don’t want to,” is not bad, as stock market adages go.

Sentiment models are looking good. Last week’s AAII sentiment survey, which measures retail sentiment, showed 50% bears. Hedge fund sentiment is similarly contrarian bullish: long/short funds are the most defensively positioned in 11 years. Insider purchases are up and exceed insider sales. The bond markets have calmed down. Inflation, as they measure it, looks like it’s calming down in the US too. 

Finally we got a Zweig Breadth Thrust buy signal. I’m not going to try and explain that technical signal here. Google is your friend. Just know that it is bullish

We heard a lot of talk about an impending stock market crash last month. I’m of the mind that if it was going to happen, it would already have happened. Last week saw an eye-watering reversal and short-covering rally. We can expect a bit of digestion over the next few days, before things get going again.

So how to play all this?

Continue reading this post for free, courtesy of Dominic Frisby.

The Flying Frisby
The Flying Frisby - money, markets and more
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