Alpha Power Investing Newsletter

August 1, 2018

The Importance of Realistic Expectations

Everybody who invests in the stock and/or bond market does so with the expectation of making money. And in the long run there is reason to be optimistic. If we look at raw 10-year price performance for the Dow Jones Industrial Average, we find that since 1900 86.5% of all 10-year periods have showed a gain. Only 13.5% of all 10-year periods have showed a loss.

Now an 86.5% "win rate" is pretty comforting. At least it is right up until the point when the market shows a loss over the previous ten years, at which point a lot of individuals throw in the towel and say, "Well if the market can't make money over 10 years then maybe there's no point in me being in it." Which typically is exactly the wrong thing to do. Likewise, after the market has enjoyed a decade of great prosperity a lot of individuals become complacent and start to take stock portfolio gains for granted. And when the next bear market rolls around they find themselves completely unprepared for the beating they are about to endure. And so it goes and so it goes.

In the long run, one of the best skills any investor can develop is the ability to spot and exploit a "trend." A trend can be defined in many different ways. One way is to compare a major market index to, say, its' own 200-day moving average. If price is above the moving average the trend is "Up", and if price is below the moving average the trend is "Down." While an approach as simple as this one can experience frustrating "whipsaws" when the market is moving sideways, the point is that during a long-term bull market the index will spend most of its time above the moving average and likewise, when a major long-term bear market unfolds the index will spend a lot of time below this moving average. This simple form of analysis can go a long way towards keeping investors on the "right side" of the market trend.

Power Zone versus Dead Zone
A variety of seasonal trends - patterns in the market that tend to repeat over long periods of time - can also serve to help investors set realistic expectations. As we have often discussed in past newsletters, the seven months of November through May of each year (the annual "Power Zone") have been much more favorable for stocks than the five months of June through October of each year (the annual "Dead Zone").

From 10/31/1949 through 10/31/2017, there have been 68 completed October to October 12-month cycles. Using month-end closing prices for the Dow Jones Industrial Average, we can generate the following facts and figures:

The annual "Power Zone" has been one of the most consistently bullish "trends" in the stock market for many decades. The interesting paradox is that while the "Dead Zone" has seen the Dow advance 65% of the time, the cumulative gain during this period is just +16% over 68 years.

The August/September Lull
As we head into August, investors should once again be setting proper expectations. While the reality is that from year to year anything can happen, the long-term history of the August-September period has been a frustrating one for stock market investors. Figure 2 displays the cumulative gain/loss for the Dow Jones Industrial Average ONLY during the months of August and September starting in 1950.

One interesting thing to note here is that the months of August and September combined have showed a net gain 35 times in 68 years. In other words, this two-month period has showed a gain more often than it has shown a loss. Despite this fact, the net result of buying and holding the Dow during August and September since 1950 has been a cumulative loss of -52%. So, while the odds of a gain are roughly 50/50, the reality has been that the "downs" have been much worse than the "ups."

Does this mean that the stock market is likely to lose ground over the next two months? Not at all. With the major market averages still in uptrends above their respective longer-term moving averages, a continuation rally is possible - perhaps even likely. Nevertheless, the Alpha strategies - as they were designed to do - continue to play the long-term odds based on market history that clearly suggests that the bulk of bear market action occurs during the "Dead Zone" months of June through October, and that the stock market is especially susceptible to downdrafts during August and September.

To learn more about how Alpha's strategies control risk, please go to Strategies and Performance section of our website at to read the brochures and fact sheets. 
To read more about Alpha's strategies, please go to the Strategies and Performance page of our website at to read the brochures and fact sheets. 

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in Figure 1 and Figure 2 do not represent actual trading and is not representative of any Alpha Investment Management strategy. The data does not include management fees or the cost of funds, trading, or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on the Dow Jones Industrial Average. Indexes are not investment vehicles and persons cannot invest directly in an index. The Dow Jones Industrial Average is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities. The data used to construct the illustrations was 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.

Alpha Investment Management, Inc. is a SEC registered investment advisor. 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.

© 2018 Alpha Investment Management, Inc.

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