Alpha Power Investing Newsletter

May 1, 2020

Market History Suggests Caution in the Months Ahead

Historically, the stock market often issues a warning sign when it does not do what it is "supposed" to do. Since 1949, the Dow Jones Industrial Average has showed a gain 80% of the time from November 1 through April 30. Interestingly - and as you will see below - when this time period does NOT show a gain, stock market performance in the subsequent six months has been significantly weaker than average. This bit of history is important to consider now because the Dow just closed April with a six-month loss.

Most of Alpha's stock market-related strategies invest in low volatility intermediate-term treasury bonds during what we refer to as the "Dead Zone" months of May/June through October. During the great bull market in the previous ten years, the stock market has often performed fairly well during this typically less favorable time of year. This type of temporary good performance during the "Dead Zone" months is not uncommon and has occurred during each of the last seven decades. In each previous case, this period of temporary good performance has invariably been followed by a typically painful "reversion to the mean" in subsequent years.

What will happen as 2020 unfolds? While we of course cannot predict what specifically will happen this time around, given that the Dow Jones Industrial Average ended the most recent six months with a loss (when it typically "should" show a gain), and that the "Dead Zone" months are overdue for a period of weak performance, one can argue strongly in terms of maintaining a cautious approach during the late-spring to late-fall months.

The Track Record
For the purposes of this test we will break the year into two six-month periods and look at the performance during these two annual periods going back to 1900:

  • 6 Favorable Months = November 1 through April 30
  • 6 Unfavorable Months = May 1 through October 31

Then we will look at how the Dow performs during the "6 Unfavorable Months" ONLY during those years when the Dow finished the "6 Favorable Months" with a loss.

When the 6 Favorable Months showed a loss, the Dow during the subsequent 6 Unfavorable Months:

  • Lost ground 56% of the time
  • The average loss for all periods was -3%
  • The average gain during up periods was +11.1%
  • The average loss during down periods was -14.3%

In a nutshell, the percentage of winning periods was less than 50%, and the average loser was bigger than the average winner.

Figure 1 displays the cumulative price return for the Dow if held only during May through October ONLY after November through April showed a loss, starting in 1900.

In sum, the Dow lost -79.7% overall during these periods. It is interesting to note that from 1941 through 1952 there were six consecutive times when a down November through April period was followed by an up May through October period (see Figure 3). If we take out this unique WWII/Post WWII boom period the cumulative loss was a fairly stunning -86% as shown in Figure 2, and the percentage of winning periods drops from 44% to 33%.

Figure 3 displays the year-by-year results during those years when the Dow closed April with a six-month loss. Column 2 shows the November through April decline and column 3 displays the Dow % + (-) over the next subsequent six months. (Data Source: www.macrotrends.com)

Summary
The Dow closed the month of April 2020 with a six-month loss. Does that mean that the market is "doomed" to decline between now and the end of October 2020? Certainly not. Still, given the combination of the historical results detailed above and the uncertain state of the U.S. and world economy, it would appear that a certain degree of caution is in order in the months ahead.

Jay Kaeppel
Director of Research
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and are not representative of the returns of any strategy. The illustrations are designed to quantify the effect of certain time periods on the Dow Jones Industrial Average as specified. Indexes are not investment vehicles and persons cannot invest directly in an index. Index funds and ETFs may vary somewhat from index returns due to management fees and portfolio structure. The data used to construct the illustrations were obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.

The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.  

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