Alpha Power Investing Newsletter

August 2, 2016

Seasonally Favorable Periods and Mid-Cap Stocks


One question that we get often about the Alpha Mid-Cap Power Index Managed Account strategy is "Why mid-caps?"
 
This month we will take a closer look at the stock market and index trends that the Alpha Mid-Cap Power Index strategy is designed to take advantage of.
 
Trend #1: The November-to-May Tendency
 
The stock market has displayed a well-established tendency to perform better from the end of October through the end of May than from the end of May to the end of October. To illustrate this tendency let's first use the S&P 500 Index, the most widely referenced broad-based index. Using monthly total return data for the S&P 500 Index, Figure 1 displays the total cumulative return for the S&P 500 during the two different test periods starting on December 31, 1980.
 
 
These results suggest that investors seeking to generate long-term gains while also minimizing risk may be well served by focusing their stock market investments during the November through May period.
 
Trend #2: The Mid-Cap Tendency
 
Now that we have established the fact that the stock market has displayed a tendency to perform better during the November through May time period, the next question is, "why focus on the S&P MidCap 400 Index rather than the S&P 500 Index?" This question is answered in fairly dramatic fashion in Figures 2, 3 and 4.
 
The chart in Figure 2 displays the total cumulative return only during the November through May period using monthly total return data for the following three indexes:
  • S&P MidCap 400 Index (MID)
  • Russell 2000 Small-Cap Index (RUT)
  • S&P 500 Index (SPX)
 
 
As you can see in Figure 2, the S&P MidCap 400 Index has experienced a gain of +7,540% during November through May since 12/31/1980. This is 1.5 times greater than the gain for the Russell 2000 Small-Cap Index (+5,019%) during the same time period and 3.33 times greater than the gain for the S&P 500 Index (+2,266%). This represents significant outperformance.
 
Rather than rely solely on "grand totals" let's also consider the consistency of performance for the MidCap Index compared to Russell 2000 and S&P 500 by looking at rolling 5-year and 10-year returns for each index during the November through May time period. This data is calculated by looking back 5 (or 10) calendar years at the end of each month. Figure 3 displays data regarding rolling 5-year returns.
 
 
Note that during November through May, the MidCap Index generated a gain over every 5-year period tested (i.e., 100% of the time). In addition, MidCap performance exceeded small-cap (RUT) performance 75% of the time and exceeded large-cap (SPX) performance 84% of the time.
 
The numbers are even more compelling when we look at rolling 10-year returns as displayed in Figure 4.
 
 
Note that during November through May, the MidCap Index generated a gain over every 10-year period tested (i.e., 100% of the time). In addition, MidCap performance exceeded small-cap (RUT) performance 80% of the time and exceeded large-cap (SPX) performance fully 97% of the time.
 
This data highlights the fact that mid-cap stocks consistently outperform small-cap and large-cap stocks during the seasonally favorable November through May time period.
 
Summary
 
The tendency for the stock market to perform better during the November through May time period is well established. This is the primary reason that the Alpha Mid-Cap Power Index Managed Account strategy focuses its stock market investments during this favorable time period.
 
Additionally, it is a much lesser known fact that the S&P MidCap 400 Index has routinely and consistently outperformed other market-cap based indexes during the favorable November through May time period. It is for this simple reason that the Alpha Mid-Cap Power Index strategy focuses its stock market investments in the mid-cap space.
 
To read about the complete strategy, go to the Strategies and Performance page of our website at www.alphaim.net and download the Alpha Mid-Cap Power Index MA brochure and fact sheet.
 

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles. The returns illustrated above are not returns of any Alpha strategy and do not include management fees or the cost of funds, trading, or other expenses. To see the impact of these costs, please refer to the net of fees and expenses performance data for specific Alpha strategies. The illustration above is designed to quantify the effect of a certain time period on representative market indexes.

Alpha Investment Management, Inc. is an 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.


© 2016 Alpha Investment Management, Inc.

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