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Don't Take a Summer Vacation From Your Investments

Despite stock market spikes and troughs, larger, long-term cycles underlie and drive the markets. Smart investors study the cycles and gamble on them.

With Memorial Day unofficially kicking off summer, what might a summer cycle bring for your investments?

Start with where we are: After hitting the most recent bottom in early March, the markets are up more than 25 percent, even with this past week's tepid performance.

Since March 6, the Dow is up 25 percent, the broader S&P 500 is up 30 percent and tech-heavy Nasdaq is up 31 percent.

We are living in rare times, and the current economic crisis is the worst in 50 years, so one would think that the markets may have come unhinged from any pattern.

But that's not the case. Indeed, this year's March rally came right on schedule. The markets showed similar March lifts from 1999 to 2005. They took March off in 2006, but resumed their March rallies in 2007, 2008 and this year.

Most market cycles go through four phases:

a) The accumulation phase, which comes right after the bottom. That was March.

b) The mark-up phase, when the technician traders kick in and you start to see media reports suggesting the worst may be over. That's where we are now.

c) The distribution phase, when sellers -- sensing the market has hit its height -- start to dominate. This is when you start to see double- and triple-tops to the markets -- spikes, followed by retreats, followed by spikes. The point is, the smart money starts to think the good times are beginning to end.

d) The mark-down phase, or the sell-off that drives the markets downward. If you're a trader, you should have sold off before this phase hits. If you haven't, you're stuck with losses.

Cycles come routinely in various times of the year.

The "January barometer" roughly says that, as January goes, so goes the year. Since 1950, there have been only five major disagreements between overall stock performance in January and for the year as a whole. The related "January effect" is the tendency of stocks as a whole to do better in January than in the rest of the year (optimism?) and for small-cap stocks to outperform large-caps.

So what should investors expect this summer?

First, keep an eye on commodities, which follow the plant-in-spring, grow-in-summer, harvest-in-fall cycle.

Keep an eye on travel-related stocks. Summer travel typically boosts stocks of companies that own airlines, resorts and cruise lines, for instance. This summer is a bit of a wild card, though. Travel experts say there's no better time to travel than this summer, if you can afford it -- fares are low and airports are empty.

In a macro sense, there's this: The markets tend to perform better between October and April than they do between May and September. Hence, the old trader's saying: "Sell in May and then go away."

So traders generally advise investors to either avoid the markets in the summer or, if they're aggressive, to buy short positions on stocks they bet will drop.

Also, history has taught us to be wary of a July sell-off. Something about the mid-summer blahs.

It's hard to imagine that the markets are going to continue upward at their break-neck, 25-percent clip. The markets are ripe for a correction, or sell-off, and the warm months historically have coincided with that, even in bull markets.

So even though summer is a good time to take a break from work, it's a bad time to take your eye off your investments.

-- Frank Ahrens
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By Frank Ahrens  |  May 22, 2009; 4:43 PM ET
Categories:  The Ticker  | Tags: Dow Jones, Wall Street, market cycles, nasdaq, s&p 500, stock cycles  
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