Alpha Power Investing Newsletter

June 17, 2014

Back in the Zone

The stock market has entered its annual "dead zone". This five-month period extending from late-May to late-October has historically produced negative returns in both large-cap and small-cap stocks. More importantly, the annual "dead zone" has contained most of the serious declines the market has suffered since 1950. The chart below documents this effect for the past 25 years.

Recently, the "dead zone" has been unusually robust. Over the past two years, the market has done very well throughout the summer and early fall, erasing memories of 2011 and 2008. Once again, we find ourselves in the agnostic camp as far as predictions go. Whether this year's "dead zone" is up or down is not something our long-term investment process is required to answer. As a long-term enterprise, our process is fixated on high probability outcomes that can be identified without the overwhelming complexity and meager success rate of traditional economic forecasting methods.

For over 60 years, the simple process of avoiding stocks and the attendant risk of large losses during the "dead zone" has paid off in spades. Our view is that missing the bulk of market disasters is an easy trade-off against capturing every advance in the "dead zone".

Academic research has demonstrated conclusively that the majority of investors, institutional and individual, are poor strategists. Both kinds of investor tend to be hypnotized by recent performance and extrapolate it into the indefinite future. The results for performance are entirely predictable…in hindsight. Our "seasonal system" ignores recent performance entirely.

This is an interesting year in the four-year presidential election cycle. Typically, (although not always) investors worry about the mid-term elections and cause a "dead zone" slump. About mid-October, the markets tend to revive as the election outcomes clarify. The fourth quarter of year two has historically been the best quarter of the cycle, with no losses since 1931. The average appreciation for the quarter since 1931 has been 7.9%. The usual "dead zone" slump would certainly increase the odds of a repeat performance.

Investment advisors and private investors can download our strategy brochures at the Strategies and Performance section of our website. A research paper on the election cycle is available in the Alpha Research section of our website.

Sincerely yours,

Jerry Minton, Ph.D.
1-877-229-9400, Ext. 11

Disclosure: Past performance is not a guarantee of future performance.

© 2014 Alpha Investment Management, Inc.
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