The next indicator in our PRO-II (Pro-Eyes) series looks at seasonality patterns. Like many indicators, they tend to be relatively short-term in nature and scope. Seasonality is one of them. This can be helpful for tactical trades or timing of potential entries into expected periods of weakness. You have probably heard of the “Sell in May and go away” seasonal pattern. It stems from the period of weakness we tend to see in May and September. But there are significant differences in seasonal patterns based on the 4-year Presidential cycle in the US markets. The fixed schedule of US elections is unique in the world. It sets up spending patterns for Congress as the fixed schedule influences budgeting decisions. We are seeing this now with the expectations of the Georgia senate race. Should the Democrats win the seats, they will be able to spend more in the next two years than if the GOP retains control of the Senate. The difference between what happens in Q1 on average versus the first year of a presidential cycle is significant and may surprise many investors. For now, the yearend Santa rally post the pending index rebalancing (Dec 21) is a clear positive. Our cycle chart averages go back to 1927 for US large cap equities.

Our chart looks at the one-month forward price return of the index. You can see based on where we are today in mid December, we have a very strong seasonal period into yearend.

Seasonal patterns S&P 500 1-Month forward returns (All Years)

History suggests that the market is at risk for a correction in Q1. No guarantee here, but if you are looking for an entry location, some time in February might be the most likely. The indicator suggests when it could happen, a bit about how long it might last and on average how deep it might go.  These are averages. It does NOT happen all the time and the magnitudes vary significantly. These are tendencies, not certainties. It is a very different seasonal pattern in the first year of a Presidential. Perhaps some uncertainty, perhaps timing on implementing new policies are explanations. On average, year one is the weakest year of the four. But 2017 was a huge year for the markets under President Trump, so clearly it is not always true. But that followed 2015-2016 that were relatively bad years. Given 2020 was a relatively good year if you don’t count COVID and the biggest recession in history, it argues 2021 may be average at best.

Seasonal patterns S&P 500 1-Month forward returns (average 1^st year Presidential cycle)

Look for more in the coming weeks from our new Berman’s Call Probable Return on Investment Index, PRO-II (pronounced Pro Eyes) Indicator. We will be launching the new website in early January so that BNN viewers can follow along with the various risk and opportunity factors we follow.

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