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Worst six months on tap?
A choppy market worried about inflation and interest rates now has another issue: seasonal weakness.
May 2, 2005: 4:32 PM EDT
By Alexandra Twin, CNN/Money Staff Writer

NEW YORK (CNN/Money) - You think the stock market's been troubling lately? Get ready for what's often the worst six months of the year.

The period from May 1 through Oct. 31 is usually not so great for stocks, as the old Wall Street saw "sell in May and go away" tells you.

But followers of the hemline indicator, the Super Bowl indicator and the dreaded Shaq curse will also tell you that these so-called Wall Street indicators are suspect. The trends can sometimes be chalked up to coincidence and they typically analyze too few years to be relevant statistically.

Still, as indicators go "the seasonal tendencies can provide a good backdrop," said Ed Clissold, senior global analyst at Ned Davis Research. "But they have to be taken within the context of whatever else is going on in the market."

And to be sure, many of the issues that are troubling investors are unlikely to just go away anytime soon.

Click here for the earnings scorecard.

Those include the slowdown in economic growth, the commensurate deceleration in corporate earnings growth, the steady rise in short-term interest rates, and -- oh yeah -- soaring prices for oil and other commodities that have pushed up the pace of inflation. (For more on whether "stagflation" is making a comeback, click here.)

The best of times ...

To demonstrate the strength of the November through April period versus May through October, the Stock Trader's Almanac tracks the gains you'd see if you invested $10,000 in the Dow industrials on Nov. 1 of each year and then sold April 30.

If you'd done that every year since 1950, you'd have earned $492,060 on a $10,000 investment, according to the Almanac. But if you'd reversed the whole process, and invested the compounded $10,000 during the May-October period, after 54 years you would have ended up with a $318 loss.

For the S&P, the gains would be $349,165 over the 54 years during the "best" six months and gains of $7,102 during the "worst" six months.

Of course, it seems perfectly logical that if the last six months weren't so great for the market, the next six might not be so bad. But does that mean a pickup is ahead for stocks?

The current strong months for the market, measured by the "Sell in May" indicator, ended Friday, with a whopping 0.4 percent gain for the Dow, and a 1 percent rise in the S&P 500.

But seasonal factors are always going to be in play to some extent, since that's a function of the "habitual behavior of society, which extends to stocks," said Jeffrey Hirsch, president and editor of the Hirsch organization, which publishes the Stock Trader's Almanac.

... and the worst of times

The second quarter, which starts in April, tends to be weaker, as the positive effects of holiday bonuses and the holiday retail sales period fade out, and a "spring cleaning" mentality kicks in, Hirsch said.

As summer rolls around, people would rather be spending less time in the office and more time enjoying the weather. That change in psychology often extends to the market as well, Hirsch said, with lower trading volume and more rangebound markets.

When the fall creeps in, the psychology switches to getting back to school and back to work and, from a stock standpoint, to cleaning house. To that end, September is traditionally the biggest loser on a percentage basis for the Dow, S&P 500 and Nasdaq.

October, which starts the fourth quarter, can be tough at the beginning but usually turns around by month end, and the quarter as a whole tends to be more upbeat, especially once work bonuses and the holiday sales period kick in.

Bulls destined to be beached?

So will this year be any different? The Fed is expected to keep raising short-term rates when the central bank's policy-makers meet Tuesday, due to the pressures from higher energy prices and other inflationary trends.

Meanwhile, as the recent weak retail sales and slide in first-quarter GDP growth make clear, fears about an economic slowdown are not unfounded.

But some market pros said stocks are more likely to churn over this period, rather than fall much.

And some are looking for something a little better.

As the months wear on, and "investors realize that the economic growth will slow, but not halt, and that the consumer is not tapped out, stocks may be able to move a bit higher," said Jon Brorson, head of growth equities at Neuberger Berman.  Top of page


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