Seasonal Bottom Due This Week: What to Expect
A few times per year, seasonal investing is very important to consider.
This week historically marks a bottom potential for U.S. large caps (S&P 500). Of course, this year, the seasonal weakness that we typically see in Q3 did not materialize. There was about a 2.5 per cent correction in August, which has long been forgotten, but the typical weak Q3 has not played out.
The chart below looks at the past 30 years, including the 1987 market crash. The peak in the seasonal trend hits in mid-July and there is a double bottom in mid and late October. One could argue that the quick August dip of 2.5 per cent fits the seasonal weakness, but it’s a thin argument.
We analyzed the years where we saw a correction in Q3 and excluded them from the next chart. What we were looking for is an average expectation of what happens in the last two months of the year during years when the Q3 seasonal patterns did not play out. What we found, which was counter to our expectation, was that the strong trend tended to continue. Our expectation, was that Q4 would have less strength in Q4 because we did not get the expected weakness in Q3. Our sample size was 10 years (1993, 1994, 1995, 1996, 2003, 2004, 2006, 2009, 2010, 2013). This was not a perfect analysis, but just a check to see what we could expect on average.
This analysis was prompted by a question I got from a viewer at out Markham event on Sunday. My answer was that I expect Q4 not to have the same bang for the buck as it typically does because we did not get a meaningful correction in Q3. When there is a Q3 correction, the average Q4 rally is about 4.7 per cent from the October low. In the 10 years where there was no correction, the average was closer to 5.7 per cent.
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