Montreal, Canada

Do seasonal trading factors generate a net profit for investors?

If market history is any guide the best time to buy stocks is in late October and the best time to sell them is in May.

According to Thackray's 2010 Investor's Guide, the most profitable trade since 1950 has been to buy large-cap stocks (S&P 500 Index) on October 28 and selling those same stocks on May 5.

An investor with an initial $10,000 applying this strategy since 1950 would have seen his investment grow to $862,619.

Investing in late October and getting out of Dodge in May resulted in an 81.4% profitability rate or 48 out of the last 59 years.

By sharp contrast, market history goes the other way for those investors coming aboard on May 5 and selling on October 28. An initial $10,000 following this strategy since 1950 suffered a decline to $5,750, or a cumulative 42.5% loss.

However, in 2008 this formula didn't work.

Marked by the worst crash in more than 75 years, history changed course as seasonal factors failed to generate a profit from October to May. The S&P 500 Index declined 1.9% from October 28, 2008 to May 5, 2009. But an investor purchasing the S&P 500 Index on May 5 – at the peak of seasonal strength – and then selling on October 28 generated a 16.5% total return in 2009.

Market history, of course, is never a sure thing. Seasonal strength factors do have some validity as investors tend to sell their losers in November and December; institutions also engage in "window dressing" in December as they dump their losers and buy those stocks that have led the market higher over the period.

Stocks also tend to get a boost in January as investors put their retirement money to work. Better known as the "January Effect," the first month of the year tends to set the pace for the rest of the year in terms of stock market performance. But in January 2009, the S&P 500 Index declined 10.9%, suggesting a bad year ahead for common stocks. Stocks did, however, stage a massive recovery off their March 9 lows and the S&P 500 Index is up about 17.7% this year, including dividends.

Stock market patterns were clearly distorted over the last 24 months in the context of the worst bear market since the 1930s. What was supposed to work from October 2008 to May 2009 failed and what wasn't supposed to generate a profit from May 5 to October 28 actually produced a nice gain.

What's ahead for seasonal patterns for 2009-2010? Considering the scope of this post-March 9 rally and the poor values available in stocks the opposite might occur once more – sell in October and buy in May. The market isn't cheap and the economy remains highly dependent on government intervention and financial support.

I'm off to the Sovereign Society's Offshore Investment Academy in Cabo San Lucas, Mexico, tomorrow. I'll be back on Monday, November 9. Have a good week.