How to Beat the S&P 500 With a easy Seasonal Trading Pattern law

PEPSICO - How to Beat the S&P 500 With a easy Seasonal Trading Pattern law

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Many of you have heard the old stock market saying "sell in May and go away". In this narrative I will delve added into this seasonal pattern and look at ways that you can profit from seasonality studies. We will use the Us S&P 500 as our benchmark index not the Uk Ftse100 which has not followed seasonality as well.

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Before I go any added I have to warn that past doing is no certify to time to come results, however, with a long established track narrative this ideas is worth considering. Also, my aim here is to look at the facts and how to profit, rather than speculating why markets tend to be weaker over the summer months.

In brief the S+P500 historically has been stronger in the middle of November to April than the May to October period. By staying out of the stock market and going in to cash in on the weaker duration a good return can be achieved than a straightforward buy and hold 12 month strategy. Also your risk can be reduced, remember, each month you are invested in the market you are taking risk, by being out of the market for 6 months of the year you have just reduced your risk by 50%

A study of price activity for the S&P 500 Index from April 30, 1945, straight through April 21, 2006, shows piquant results. The S&P 500 industrialized an midpoint of 7.1% during the November to April duration over that span (without dividends reinvested), it posted an midpoint gain of only 1.5% from May straight through October. What's more, the November straight through April duration outperformed May straight through October 68% of the time.

History shows that the S&P 500's worst month is September, and that the worst three-month duration is the third quarter. October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the November straight through April duration the benefit of starting at a lower base. January also tends to be a strong month with New Year optimism and pension funds tend to spend new money, April also sees many individuals add to their retirement pension plans.

An piquant study was done by the the Stock Trader's Almanac which demonstrated the power of seasonality. They tracked what would happen to a ,000 venture in the stocks that make up the Dow Jones market Average.
Money invested in the Dow stocks (you could use the Dia replacement Traded Fund or a Wall road spread bet to get the same effect) in the "best six months" and then switched to fixed earnings in the "worst six months" over 56 years grew to 4,323. But money invested in the Dow in the "worst six" and then switched to fixed earnings in the "best six" compounded to a loss of 2.

The chart below shows seasonality on the S&P500 and as you can see the gains come at the start and end of the year, being out of the market from May to 1st November.

How to trade seasonality's

A straightforward way would be a Financial Spread Bet. You could buy an up bet on the Spy which is the S&P500 tracking stock from the 1st November to 30th April and switch to cash for the weaker months. Your stop would be colse to 30% below the index, so if the S&P 500 was trading at 1300 the Spy would be at 130.00 your stop would be 30% below at 91.00. With a 30% stop you would not be worried about shorter term swings.

Another way would be to use fixed odds bets with http://www.betonmarkets.net You could use Bull bets to bet the S&P to go up from 1st November to 30th April and then use Bear bets to back the S&P to be no more than 3% higher on the 1st November than it was on the 30th April. So if the market is down you would win, if it goes sideways or up less than 3% you would win. You could turn the 3% margin but this would sacrifice your returns, but it would make the bet safer.

What holds up over the summer?

So far we have looked at the whole S&P 500. If we look at the S&P sector indices since 1990 which is as far back as I could find dependable data, we see that defensive sectors hold up good during the May to October duration and in fact show a gain.

One of the best sectors has been consumer Staples, big boring, cash rich companies such as Proctor& Gamble, Altria, Pepsico, Colgate Palmolive and Cocoa Cola

So rather than go to cash during the weaker months you could park your money in the plump Spdr consumer Staples Etf (Xlp). The midpoint return on this has been over 4.8%, so adding this to your 7.1% (the return from the distinct months) you're on 11.9% return betting the S+P 500. Over 15 years this has given a return of 8.8% per annum (without dividends reinvested).

Conclusion

As a trader or investor it's worth taking time to study seasonal patterns especially those with long track records. The above outlined strategy at its most basic would allow you to capture the majority of the year's stock market gains and still make a return on your venture from interest the months you are out of the market. A slightly higher risk strategy would be to rotate to a defensive sector in the weaker months which can be done cost effectively with an replacement Traded Fund.

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