How Often is the Dow Negative in May?

I may be getting a little ahead of myself here, but since the Santa Claus rally has been in full effect in 2012, I'm starting to think about the next time that the markets will hit a seasonal turning point.  The next big seasonal mile marker is when we are supposed to "sell in May and go away" 5 months from now.

In the recent past following the adage has been pretty effective.  The Dow has been down 3 years in a row in May, and 4 of the last 5.  In fact, even in 2009 when the market was rallying from the depths of the bear market, the index did take a breather around May.

The fact that seasonality has held so well in May got me to thinking about how and when the streak could end.  After all, in the 113 year history of the Dow, May is only negative a little over 50% of the time.  So will 2013 be a year to shirk seasonality?

Below is a chart that can perhaps help provide some guidance.  It shows the length of Dow losing streaks in May.  There have been three times that the Dow was negative in May for more than 3 years in a row.  The longest streak was between 1965 and 1971 when it was negative 7 years in a row.

Is [The] Santa Claus [Rally] Real?

The end of this week will bring the end of November, and with that there is the usual seasonal talk about a Santa Claus rally in the stock market.  The logic goes that stocks usually rally between Thanksgiving and Christmas, but much like with Kris Kringle himself, it's fair to ask the question: does the Santa Claus rally really exist?

Looking at the historical data, since 1957 December has been a positive month on average for equities.  In the past 5 years it has been especially good--powered by a nearly 11% gain in 2008 and 4% gain in 2010.  Below is the average path that the S&P 500 takes during December.  It demonstrates some Christmas magic may indeed exist--the path is even strangely sleigh like...

Sell in May and Go Nowhere...

With summer 2012 in the books, below is a chart of the S&P 500 since May 1.  Despite a reasonably large pullback to start May, at the end of summer we find the average right where we left it.  From open to close the S&P 500 was up 0.62% over the time period.

Dow Monthly Best and Worst Returns

Aaaaaand we're back.

Now that we're past labor day, the summer of 2012 is (unofficially) over.  Kids are headed back to school and everyone else back to work.  For the market, the transition to fall has historically made for a bumpy September.  Below is a chart of Dow Jones returns since 1900 showing the maximum and minimum monthly returns for each month as well as the average return.

Not only is September one of three months that shows negative returns on average, it also has the distinction of being the month with the greatest negative skew, meaning that the worst month in the history of the Dow was in September.  Of course, there is nothing mystical about these numbers, and just because September has historically been a tough month doesn't mean it has to be in 2012.  Nonetheless, with the S&P near YTD highs, perhaps it's wise to proceed with caution.

Gold Hitting Seasonal Tailwind

Gold is up more than 1% today, which is the first day in a long time that the metal has had notable outperformance relative to the S&P 500.  While gold has moved sideways for most of the year and is only up 4.5% year to date, we are soon entering a time of year that has historically been pretty favorable  for gold bulls.  The favorable seasonality is said to be driven by the Indian harvest/festival season when farmers spend profits on gold.  India was having drought problems of its own earlier this year, but has since seen a nice recovery in rainfall.  Diwali on.

Trading Pattern 2012 vs. 2011

As we get into the final weeks of July, we find the market in an eerily similar spot to the one that it was in this time last year.  So far 2012 has looked a lot like 2011.  Hopefully we don't repeat last year's steep drop to begin August.