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In the agricultural markets there are often strong seasonal tendencies related to the planting, growing and harvesting of crops in the Northern Hemisphere. Obviously this annual cycle impacts the available supply of ag products like corn, soybeans, and so on, which in turn affects price expectations come the harvest. Some commodity traders design strategies to take advantage of these seasonal trends, and books have been written about how a would be ag investor may be able to bend the seasonal cycle to his, or her, advantage.

Seasonal trends in the financial markets are much less obvious, because there is no easily identifiable planting, growing and harvesting cycle at work. However, there is one seasonal worth mentioning, which is often at work in the equity market. Numerous studies have shown that over the last one hundred years, or so, almost all the gains in the stock market have occurred roughly from Halloween to Easter each year. And, the period from Easter to October has made almost no positive contribution to the overall performance of the S&P-500.

The positive seasonal tail wind for stocks from Halloween to Easter is obviously a blunt financial tool, and a significant challenge to apply successfully, but not without a valid basis. Income taxes for the current year ending December 31st are due to be paid in full by April 15th of next year. This annual not so pleasant deadline gives rise to a flood of new money contributions coming into retirement accounts, as the deadline for the current tax year’s retirement contributions loom. Most financial institutions immediately put this flood of new money into the stock market, which in turn creates an artificial seasonal demand for stocks. This process is also boosted by other factors like spending for back to school, or college. Regardless of the contributing factors, this financial seasonal has been proven to exist, but alas the seasonal tendency is not a surgical tool in an investor’s tool box, but more like a tail wind is to a jet airliner, which may be at work sometimes at varying levels of strength.

The bottom line on the positive seasonal influence on the stock market from roughly Halloween to Easter is investors may want to be a bit more aggressive with their asset allocation to equities during this period, if their analytical tools are confirming that demand is strong relative to supply, and/or the strength in demand is growing relative to supply.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in yellow with the S&P-500 in weekly format overlaid in red and blue candle chart format.

TATY painted out a bottom marginally below the red zone in August, and another bottom in the red zone in September. When this indicator is making bottoms in, or near, the red zone demand is in the superior position to supply. There is no documented case of a major stock market top having formed when TATY is painting out bottoms in, or near, the red zone. Every major top, and the expiration of every major rebound rally during bear markets, over the last almost four decades have occurred after TATY declined into the caution zone surrounding the yellow 115-125 level followed by the indicator stalling out in, or near, the red zone surrounding the 140 level, and then beginning a persistent decline. Price bottoms tend to form in the stock market after TATY bottoms, and then begins to paint out an accelerating positive divergence higher, even as the price continues to probe for its final low.

Diagnosing the formation of a major stock market top is an extremely difficult exercise, and virtually impossible to accomplish successfully without sophisticated, and time tested, analytical tools like TATY. No indicator is perfect in this business, and they all have their individual quirks, but TATY does have an enviable record, and is the best analytical tool I’ve discovered for identifying the formation of major tops after my ongoing multi-decade search.

SAMMY   —   A REPRESENATIVE OF A TACTICAL FAMILY OF SUPPLY AND DEMAND INDICATORS

SAMMY excels at identifying resurgent demand after sellers have exhausted their propensity to sell. It is shown above in the second chart with the SPXL 3X leveraged S&P-500 ETF overlaid. SPXL is for reference only.

SAMMY is of little value during rallies, and the formation of tops, so it is shown above for information only. SAMMY will become extremely valuable again, when the stock market serves up the next tradable bottom. As a tactical indicator, if the big picture strategic indicators are flashing a favorable investment environment, then an investor armed with SAMMY would likely take every signal of exhausted sellers giving way to resurging demand, as an opportunity to put money to work in equities   —   regardless of the price level, or market valuation.

In Capitalism supply and demand determines the price, not the evening news, nor market valuations, rich though they may be currently. For example, the NASDAQ was soaring in the late 1990s, even as valuations became exponentially expensive, but supply and demand continued to drive the price higher powered by expectations the emerging internet would have a huge impact on commerce, and eventually it did. Some internet concept companies came public in those days without any SALES, not to mention no profits! Markets rise and fall on future expectations driving the balance of supply and demand, and not by what is already known and priced into the stock market.

THE BOTTOM LINE

The equity market is not cheap, and the news is really awful for a period of relative peacetime, and all this bad news is coming at investors as if we were drinking from a fire hose. However, while volatility may very well increase due to the uncertainty implied by the looming election, the classic signs of a major top having formed in the stock market are simply not yet in evidence vis -a-vis our proprietary supply and demand indicators. Given the stock market is entering a positive seasonal period, and the lack of objective evidence of a major top forming, investors may reasonably expect the current stock market rally to attempt renewed assaults on new all-time highs, until evidence arrives that supply is moving toward the superior position relative to demand.

 

DISCLAIMER: Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.

ByOptimist Capital

Optimist Capital Institutional Wealth Management for All

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