Through November 1 of this year, the NASDAQ is up 29.9%, the Dow is up 19.2%, and the most comprehensive U.S. blue chip stock index, the S&P 500, is up 23.5%. Pinch yourself. Are we dreaming? How can the market perform so well in such a slow-recovering economy and a government in a seemingly permanent state of disrepair? Can we possibly keep steaming ahead from this point forward?
History (and market fundamentals) say the clear answer is YES. Let’s start with history. November is typically one of the best months on the calendar to buy stocks. Since 1950, the S&P has risen an average 1.6% in November, but that’s just the appetizer. November often begins the best three months of the year (through January 31) and the best six months (through April 30). Winter provides the payoff of the “Sell in May and Go Away” strategy. The flip side of that chestnut would be “…then Remember to Buy in November.”
We don’t advise selling in May, but if you did, it’s not too late to buy now. In the last 20 years – through three great bull markets and two painful bear markets – the six cold months (November through April) have averaged gains of 6.6%, while the six warmer months (May through October) have averaged just 1.1% gains. The trend is even more dramatic in recent years. Since 1998, the S&P 500 has gained an aggregate total of 145% in the six colder months, while it has LOST 28% in the six warmer months.
In the last four years of this bull market, the cold months (November 1 to April 30) delivered 66.5% gains in the S&P 500, while the warm months (May 1 to October 31) delivered microscopic gains of just 1.8%.
S&P Performance in Cold Months vs. Warm Months, 2010-2013
- For the Six Months Ending:
- YearApril 30October 31
Source: S&P 500, Yahoo Finance
There are several sound reasons why markets tend to rise from November through April. Louis Navellier has written that “seasonal strength is typically caused by year-end pension funding as well as folks tending to be happier during the holidays. As we gather to celebrate Thanksgiving with friends, family, food, and football, consumer sentiment tends to improve, which usually rubs off on investor sentiment and causes an early January Effect. These positive feelings typically continue in the New Year when the stock market benefits from persistent inflows caused by more pension funding in a new year. These strong inflows typically persist through April, so the next six months could be strong.”
November and December Bring Holidays… and Superior Profits
Turning to the shorter term, November as a standalone month has been superb, and so has December, so time’s a wasting for the fence-sitters among us. According to Bespoke Investment Group (BIG), November is the second best month in the last 20 years, behind only April, and December comes in at #3. The Dow Jones Industrials have averaged 1.88% in the last 20 Novembers, while the S&P 500 isn’t far behind at 1.68%.
The track record is even better in good market years, like this. According to Bespoke, “In the 35 years (since 1928) in which the S&P 500 has been up more than 10% year-to-date through October, the S&P 500 has averaged a November gain of 2.57% with positive returns 73.5% of the time. Over the final two months of these years, the S&P has averaged a gain of nearly 5% with positive returns 82.4% of the time.”
In the 13 years in which the S&P has risen over 20% through October 31 (like this year), Bespoke adds: “The average November return gets even better at +3.22% with positive returns in all but two years (1938 and 1943). The last two times the S&P 500 was up more than 20% YTD through October were in 1995 and 1997. In 1995, the index gained 4.1% in November and 5.92% through year end, while in 1997, the index gained 4.46% and 6.1% through year end.” By contrast, November is soft when the full year is bad.
Last week, I told you how Bespoke said the market is “overbought,” and I questioned why anyone would sell based on that fact alone, since previously overbought markets stayed overbought for a long time.
Bespoke provided further proof of this fact in the following paragraph: “Following most periods where the S&P 500 traded to overbought levels, it continued to stay overbought. In fact, so far this year, the S&P 500 has closed the day at overbought levels on 137 out of 212 trading days (65%). Compounding the frustration even further, when the correction finally did occur, the market bottomed above the levels it was trading at when it first became overbought. If you think 2013 has been frustrating, though, just thank yourself that this is not 1995, 1954, or for that matter even 1958. In all three of these years, the S&P 500 closed at technically ‘overbought’ levels at least 74% of the time…. In both of these years, the S&P 500 finished the day at ‘overbought’ levels on an astonishing 81% of all trading days.”
In a Five-Year-Old Bull Market, Stock Selection Becomes Paramount
The market will likely keep rising, but that does not mean all stocks will rise evenly. Several Navellier analysts have told me recently that they see thinner breadth in this market. The averages are rising on the strength of fewer and fewer stocks. Last week, I compared this earnings season to a tepid pool of equal parts boiling water and ice. This is the time in a bull market when stock selection becomes paramount.
Once again, I’ll quote Louis: “Even though a lot of market pundits like to say that indexing is better than active portfolio management, I have never heard one of these pundits admit that indexing caused the bubble in technology stocks back in March 2000 when 54% of the S&P 500 ended up in seven giant technology stocks due to the capitalization weighting associated with the S&P 500. In other words, much of the technology bubble that formed in the late 1990s underneath Cisco Systems, Oracle, and other large technology stocks burst in March 2000, due to the capitalization weighting that created a feeding frenzy.”
We believe now is the time to “look under the hood” of each stock you buy, rather than buying index funds or the biggest-cap fad stocks. Even in a solid bull market, traders tend to resemble a manic crowd that buys or sells first, then watches the tape, then regrets undertaking such a hasty action. As more brokers merely “chase” stocks, few are looking under the hood at the bubbles of excessive valuations that are forming.
Due to the recent flight to quality, it’s important to find advisors who are willing to examine each stock rather than jumping into the overall market. Look for the stocks with the strongest sales and earnings momentum, and also remember to trim stocks when they become over-weighted after outrunning the overall market. This stock market remains very selective, so now might be the best time in the bull market to consider one or more of the Navellier-managed growth portfolios (see www.navellier.com).
Written by Gary Alexander