Sell in May (update)

An update on the Sell in May Effect (also called the Six-Month Effect, or Halloween Effect in the US).

In the six months Nov 2015 to Apr 2016 (Winter period) the FTSE All-Share Index fell 1.8%. Previously, the Index had fallen 7.3% over May 2015 to Oct 2015 (Summer period).

The outperformance of the Winter market over the Summer market was therefore 5.5 percentage points, which supports the Sell in May Effect.

The following chart shows the outperformance of the FTSE All-Share Index in the Winter period over the previous Summer period since 1982.

SIM Outperformance of winter over previous summer market [1982-2016]

In the 16 years since 2000 the Winter market has outperformed the previous Summer market 11 times, with an average outperformance of 5.2 percentage points.

Other articles on the Sell in May Effect.

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Will 2015 be the first 5th year of decade to end down since 1945?

Since 1875 the UK market has seen negative annual returns only twice in the fifth year of the decade. As can be seen in the accompanying chart, since 1875 the down years were 1915 and 1945 (and 1945 was down only 0.6%).

Annual returns for 5th year of decade [1801-2015]

As of the close 24th December the FTSE All-Share index was at 3449.5, (2.4% below its 2014 close of 3532.7).

The market has three days to climb above 3532.7 and end the year in positive territory.


The answer to the heading is: yes. The FTSE All-Share index ended 2015 at 3447.46: down 2.41% on the year.

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Correlation of UK and international stock markets

The following charts show the correlation of monthly returns between the FTSE All-Share index and six international indices for the period 2000-2014.



Correlation of FTSE All-Share Index and DAX [2014]

Correlation of FTSE All-Share Index and CAC40 [2014]


Correlation of FTSE All-Share Index and Nikkei 225 [2014]


Correlation of FTSE All-Share Index and Hang Seng [2014]


Correlation of FTSE All-Share Index and All Ordinaries [2014]


Correlation of FTSE All-Share Index and Bovespa [2014]


The first observation is that all the markets are positively correlated with the UK market.

The next question is how closely correlated are they?

The following table summarises the R2 values for the correlation between the FTSE All-Share Index and the six international indices; the equivalent values are also given for the previous year. The higher the R2 figure the closer the correlation (R-Squared is a measure of correlation – in effect, how close the points are to the line of best fit).

Index R2 R2 (2013)
CAC40 0.78 0.79
DAX 0.69 0.70
All Ordinaries 0.61 0.62
Hang Seng 0.48 0.49
Bovespa 0.45 0.47
Nikkei 225 0.37 0.39

By visual inspection it can be seen that in the charts of CAC40 and DAX the points are more closely distributed around the line of best fit. This is confirmed in the table where it can be seen these two markets have the highest R2 values with the FTSE All-Share (the CAC40 value of 0.78 is now higher than that of 0.76 for the S&P 500). The index with the lowest correlation with the UK market (in the sample) is the Nikkei.

The practical impact of this is that if a UK investor is looking to internationally diversify a portfolio they would do better by investing in markets at the bottom of the table (low R2) than at the top. And the good news for investors looking for diversification is that the correlation between the UK market and all the international markets in this study has fallen in the past year.

See also correlation between the US and US stock markets.

UK Stock Market Almanac cover [160 x 240]The above is an extract from the newly published UK Stock Market Almanac 2015.

Order your copy now!





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Oil and the stock market

1. Oil price

The following chart plots the US dollar price of oil from 1971 to today.

West Texas Intermediate ($) [1971 - Nov 2014]The following chart plots the same data but on a log scale.

West Texas Intermediate ($) [1971 - Nov 2014] log scaleOn this second chart the proportionate fall in the oil price recently can be seen more clearly.

2. Oil price $ v £

The following chart plots the US dollar price of the oil against the price in sterling; both data series have been re-based to start at 100.

West Texas Intermediate ($ v £) [1971 - Nov 2014] - rebased to 100Since 1971 the oil price has risen 1,758% in US dollars, and 2,771% in sterling.

3. The stock market priced in oil barrels

The following chart plots the FTSE All Share Index priced in oil barrels (i.e. FTSE All Share Index divided by the oil price in sterling).

FTSE All Share-West Texas Intermediate (£) [1971 - Nov 2014]The current level of the of the ratio is 85.0, which is pretty close to the average of 88.3 for the period since 1971.

UK Stock Market Almanac cover [160 x 240]

The most recent edition of the UK Stock Market Almanac has just been published.

Order your copy now!


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US mid-term elections

Multiple ballots are held at the time of the US mid-term elections, including those at the municipal and state level, and also all the seats are up for election in the House of Representatives and a third of the seats in the Senate.

They are called “mid-term” as they take place in the middle of the four-year presidential term; in other words they take place two years after the presidential election. As such they are often regarded as a referendum on the performance of the prevailing president and his party.

In a recent article in the Financial Times, Ken Fisher described a market anomaly that he calls the 86.4 per cent miracle. According to Fisher, since 1925 returns on the S&P 500 have been positive for 67.4% of all calendar quarters, but for the 4th quarter of a mid-term election year and the two following quarters returns have been positive on average 86.4%. Fisher summarises-

midterm elections mean three straight quarters where the market rises 28 per cent more of the time than average.

What is the reason for this? According to Fisher: legislative gridlock. During electioneering campaigns politicians promise lots of radical legislation (that investors invariably dislike) to buy votes. But the reality of most mid-term elections is that the president’s party loses seats resulting in gridlock in Washington. In other words, while there is much sound and fury in the lead up to an election, it is followed by relative political calm – which investors like.

Given the high correlation of the US and UK equity markets, might this anomaly also apply to the UK?

The following chart plots the proportion of positive returns for the FTSE All Share Index for all quarters (grey bars) and those for the 4th quarter of a mid-term election (MTE) year (purple bars) and following 1st and 2nd quarters. To analyse the consistency of the anomaly over time, results are given for four different time periods.

For example, for the period 1910-2014, the FTSE All Share Index has had positive returns in 61% of all quarters, 62% of 4th quarters of a mid-term election year, 77% of the following 1st quarters, and 81% of the following 2nd quarters.

US mid-term elections and positive returns for FTAS [2014]Looking at the above chart the first observation to make is that the UK market experienced a greater proportion of positive returns in the 4th quarter of mid-term election years and the following two quarters than the average for all quarters – and this applied for all four of the different time periods tested. So this was consistent with the US results quoted by Fisher.

Regarding the period 1925-2014 (the period referred to by Ken Fisher), returns have been positive in 62.1% of all quarters (this compares a figure of 67.4% for the S&P 500 quoted by Fisher), and the average for the three (MTE) quarters has been 75.8% (compared with 86.4% for the S&P 500). So, where Fisher found that the three (MTE) quarters rose 28% more of the time than the average, in the UK the equivalent figure has been 22%.

A second observation to make is that the out-performance of the 4th and 1st (MTE) quarters over the average for all quarters has markedly increased in the most recent period from 1980. And that since 1980 the (MTE) quarter with the highest proportion of positive returns has been the 4th – in fact the UK market has risen in every 4th (MTE) quarter since 1980.

The following chart is similar to the above, except that it plots the average returns instead of the proportion of positive returns. For example, since 1910, the average return of the FTSE All Share Index for all quarters has been 1.5%, for the 4th (MTE) quarter it has been 2.4%, for the 1st (MTE) quarter 6.3%, and for the 2nd (MTE) quarter 4.2%.

US mid-term elections and average quarterly returns for FTAS [2014]Generally, the same profile of performance seen above is repeated here – all three (MTE) quarters out-perform the average. Since 1925 the average return for all quarters has been 1.7%, whereas the average return for the three MTE quarters has been 5.0%.

In 2014 the US mid-term elections will be held on 4 November, while the 4th (MTE) quarter starts 1 October. Fisher predicts “glorious gridlock” and a consequent “magical melt-up” for the market.


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Quarterly sector strategy

In the Almanac the performance of the FTSE 350 sectors in the four quarters of the year can be found. From this data the sectors that have been the strongest in each respective quarter can be identified. For example, house building stocks are typically strong in the first quarter of each year, so this sector could be chosen as the strong Q1 sector.

This suggests a strategy which repeatedly cycles a portfolio through the four strong sectors for each quarter. In other words, the portfolio is 100% invested in the strongest 1st quarter sector from 31 December to 31 March, then switches fully into the strongest 2nd quarter sector to 31 June, etc. for the following two quarters, and the same thing again for the following years. The same four sectors are used each year.

The following chart illustrates the performance of such a strategy for the period 2007  to Q1 2014, with a comparison to the FTSE All-Share Index. Both series have been re-based to start at 100.

Quarterly Sector Strategy (2007-2014)

In this analysis the strategy was restricted to the same four sectors each year; a refinement would be to dynamically change the four sectors by re-analysing the latest data each quarter.

Another variation would be to hold the three strongest sectors each quarter instead of just the one sector.

Weakest quarterly sectors

As well as the historic strongest sector for each quarter, the historic weakest sector for each quarter can also be determined.

The following chart shows the out-performance of the of strongest sector for the quarter over the weakest sector for the quarter for each quarter since 2007.

Out-performance of strong over weak sectors for each quarter (2007-2014)This suggests a strategy combining the strong and weak quarter sectors.

Hedged strategy

A variation of the first strategy would be to add a short position in the weak sectors in each quarter. For example, in Q1 the strategy would be long the strongest Q1 sector and short the weakest Q1 sector.

The following chart shows the performance of such a strategy over the period 2007-2014. For comparison, the unhedged strategy from above is also shown on the chart.

Hedged Quarterly Sector Strategy (2007-2014)bThe hedged strategy under-performs the first, unhedged strategy, but experiences much less volatility. The standard deviation of the quarterly returns of the first strategy is 0.16, whereas the hedged strategy has 0.10 (for comparison the standard deviation of the quarterly returns of the FTSE All Share Index over the same period was 0.11).

Note: These strategies assume that certain sectors display a quarterly seasonality behaviour; i.e. whereby certain sectors are consistently strong (or weak) in the same quarters each year.


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Fred Perry, Andy Murray and the stock market

Congratulations to Andy Murray! We thought we would join in the fun…

After the Great Crash of 1929, the UK market bottomed in June 1932; 49 months later Fred Perry won Wimbledon.

After the Credit Crunch of 2007, the UK market bottomed in March 2009; 51 months later Andy Murray won Wimbledon.

The following chart shows the performance of the FTSE All Share Index for Jan 2007 – Jul 2013 overlaid on the index for Jan 1930 – Dec 1939. The index has been re-based to 100 in both cases.

Of course, correlation is not causation…but, spooky no?

If the market today continues to follow the Fred Perry market of the 1930s, we can expect the UK market to be strong for another five months (to around December 2013) and after that, a big sell-off.


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