Alpha Power Investing Newsletter

March 2, 2018

Does an Early Year Sell-off Spell Trouble?

After one of the smoothest bull market rides of all time, the stock market finally ran into some turbulence in the early part of February 2018. A swift market decline is always unsettling, but it can be especially so when investors become complacent in the face of a long advance. At this point, what's done is done. Now the question on most investors' minds is "what happens from here?"

At Alpha Investment Management, we do not attempt to "make predictions" or forecast what will happen next in the stock market. We do, however, examine a great deal of market history in an effort to better understand how the market has reacted to events in the past to see if there are any consistent patterns that exist that can help to bolster investors' confidence in the long-term consistency of our strategies. In light of the sharp stock market decline during February, in this newsletter we will look at what has happened in the past when the stock market has experienced a decline early in the year.

The Alpha Mid-Cap Power Index Managed Account strategy holds the S&P 400 MidCap Index during the annual "Power Zone" months of January through May and November through December. So we ran the following test:

  • For our "trigger" we identified and examined those years from 1981-2017 when the S&P MidCap 400 Index experienced a loss for the month(s) of January AND/OR February.
  • For only those years which saw a loss for the S&P MidCap 400 Index for the month(s) of January AND/OR February we then examined the remaining "Power Zone" months of March, April, May, November and December using the total returns of the S&P MidCap 400 Index to see how that index performed following weakness early in the calendar year. The results were quite encouraging.

Figure 1 displays the year-by-year results of our test. Please note that the returns below represent buying and holding the S&P MidCap 400 Index only during five months out of each year listed and does not include any interest earned while out of the stock market.

During these 21 years the S&P 400 MidCap Index generated gains 18 times (86% of the time) over the remaining five "Power Zone" months (March through May and November through December) of the year with an average gain of +12.1% (using monthly total return data).

The results presented in this newsletter are not intended to represent a standalone investment strategy. The key point is simply to note the consistency of returns generated during the remaining "Power Zone" months after the stock market experiences early year weakness.

It is especially instructive to note that the S&P MidCap 400 Index registered a net gain during these months in the bear market years of 1981, 2000, 2001, 2002 and 2008. While past results do not guarantee future performance there is some confidence to be gained in knowing that it is possible to profit during a bear market year by following an objective strategy.

Regardless of what happens in 2018, we believe the key point is simply to note that the Alpha Mid-Cap Power Index Managed Account is a strategy with a consistent record of long-term success.

To read more about Alpha's strategies, please go to the Strategies and Performance page of our website at to read the brochures and view the actual performance results.

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

Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles and persons cannot invest directly in an index. The returns illustrated above are not returns of any Alpha Investment Management 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 certain time periods on the S&P MidCap 400 Index. The data used to construct the illustration 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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