According to the Stock Trader's Almanac, November is the beginning of the stock market's strongest six-month period. The "Best Six Months Switching Strategy" goes like this: Invest in the Dow and/or S&P 500 between November 1 and April 30 each year, then switch into safer fixed income assets in May.
"We found that most of the market's gains are made from November to April, whereas you either go down or are flat from May through October; hence the sell in May and go away [strategy]," says Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac.
Historically, there's a soft period from May through October, as seen in STA's chart below.
Source: Stock Trader's Almanac
"We like to buy in October and get ourselves sober, even though we didn't get our trigger this year because the market was vacillating quite a bit," says Hirsch. He uses a MACD indicator as a trigger for buy and sell moves. Using the MACD, the DJIA's Best Six Months rises to an average gain of 9.3% versus a loss of 1.2% during the Worst Six Months.
On average as seen in the chart below, the Dow Jones Industrial Average has risen 7.5% during the Best Six Month period since 1950, versus 0.3% rise during the Worst 6 Months.
Source: Stock Trader's Almanac
"Last year everyone was bearish — I was one of the lone bulls on the Street. I was really happy with our buy signal," says Hirsch. "This year I'm not so confident because the market technically is struggling against resistance; there are a lot of issues, there's a post-election year coming up, there's fiscal cliffs. So we're going in with tighter stops with our trades this year."
Needless to say, November is off to a very weak start with the DJIA, S&P 500 and Nasdaq all down over 4% month-to-date. Hirsch has already warned of risk in 2013 based on the election cycle and historical weakness when an incumbent president is re-elected.
"Again, we're at the sour spot of the four-year [presidential election] cycle," he admits. "We'll make our trades, but we'll be a lot more cautious and keep the stops a lot tighter instead of leaving it wide open here."
If this is as good as it gets, maybe that's a sound warning for the year ahead. How are you positioning for 2013? Let us know in the comment section below or visit us on Facebook!
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