The Stock Market in June

A quick glance at the accompanying chart (showing the monthly returns of the FTSE All-Share Index in June since 1984) shows that this is not a good month for shares. Historically, the May-June period has been the weakest two-month period in the year for the equity market.

Monthly returns of FTSE All Share Index - June (1984-2015)

In the nine years since 2007 the market has only risen in June in one year ­ the average June return over those nine years is -2.8%. And in June last year the index fell 6.%! This dismal record makes June the stand-out worst month for shares in recent years.

Over the longer term the record is a little better, since 1970 the average return in June has been -1.1%, but also over this period it is the only month in the year with more negative returns seen in the month than positive returns.

So, not much cheer to be expected for shares this month.

In an average June the market starts strong, hitting its month high on the second or third trading day, but prices then drift down steadily for the rest of the month, although the market ends the month on a positive note – the last trading day is the second strongest in the year.

Regarding sectors, despite the overall market weakness in June, three sectors have gone against the trend and seen consistent strength in the month: Beverages, Oil & Gas Producers and Pharmaceuticals & Biotechnology. But while many sectors not surprisingly experience weakness in June, none are consistently weak over many years.

Not much action on the results front this month, June is the quietest month for results from FTSE 100 companies – just two companies making announcements this month.

This is quite a busy month on the economics front: there is the ECB Governing Council Meeting on the 2nd, US Nonfarm payroll report on the 3rd, FOMC interest rate announcement on the 15th, followed the next day by the MPC interest rate announcement on the 16th. And not to forget Triple Witching on the 17th.


Article first appeared in Money Observer

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The Stock Market in May

It’s Sell in May time again. Already! Often stock market sayings turn out to be unreliable, at best. But the Sell in May aphorism is spookily accurate. It describes the tendency of the market to be weaker from May to October than it is for the other six-month period of the year. How true has this been? Well, in the last 33 years the saying has been right 28 times, and the average annual out-performance of the November-April period since 1982 has been 8.6%. Very few trading systems can match that record.

Monthly returns of FTSE All Share Index - Mayl (1984-2015)

Sell in May

Usually stock market anomalies, once they have been identified, don’t last long. But the Sell in May effect has been around for decades ­ one academic paper found evidence of it in the UK market starting from 1694. And the effect is currently as strong as ever. For example, for the latest period: the FTSE All Share Index was up 7.3% over the six-month period Nov 2014 to Apr 2015 and down 7.3% for the following period May 2015 to Oct 2015 (a rather oddly symmetrical performance!)

Given the strength of the Sell in May effect it is not surprising that May itself is one of the weakest months of the year for shares. There are only three months where, since 1970, the market has an average return of below zero in the month – May is one of them (the others are June and September). On average the market falls -0.2% in the month, and the probability of a positive return in the month is below 50%. Since year 2000 performance has been even worse, with an average return of -0.6% for the month.

It’s not immediately obvious why May has been historically weak for the stock market. The month is weak for most stock markets worldwide, so whatever the reason it’s unlikely to be anything UK-specific, such as the timing of the UK’s financial year.

The average market in May

On average in May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half ending with the weakest day of the year for shares on 30 May (although the LSE will be closed this year on that day for Spring Bank Holiday).

May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.9 percentage points in May.

Stocks

Over the last ten years, strong sectors relative to the general market in May tend to be Aerospace & Defense, Electricity and Food Producers; while the weaker sectors are: General Industrials and Life Insurance.


Article first appeared in Money Observer

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The Stock Market in April

April – one of the most exciting months for investors! Five years ago April was the strongest month for the stock market in the year, but it now ranks second behind December. The two months have been switching first and second places for quite a few years now. For the last few years it has been December, but April is not far behind. Interestingly, this characteristic is not unique to the UK market; a study of 70 markets worldwide found that the strongest months for shares were (in descending order) December, January and April.

Monthly returns of FTSE All Share Index - April (1984-2015)

On average the market rises 1.8% in this month; and the probability of a positive return in the month is 71%. Since 2003 the market has only fallen three times in April; although this doesn’t match the earlier performance: from 1971 the market rose in April every year for 15 years – a recent record for any month.

As can be seen in the chart, the strength of the market in April has been fairly constant since 1984 apart from in a few years.

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year. The market then tends to be fairly flat for the middle two weeks and then rising strongly in the final week.

FTSE 100 v S&P 500

This is the strongest month for the FTSE 100 relative to the S&P 500 (in sterling terms), the former out-performs the latter by an average of 1.3 percentage points in April (in 2015 the FTSE 100 out-performed the US index by 5.1 percentage points).

April also often sees strong performances by sterling against the dollar and oil.

The seasonality significance of April is that it the last month in the strong part of the six-month cycle (November-April), that is a feature of the Sell in May Effect (called the Halloween Effect in the US). Therefore investors may be reducing their exposure to equities ahead of May.

Diary

In the diary this month we have US Nonfarm payroll on the 1st, MPC interest rate announcement on the 6th, and the two-day FOMC meeting start on the 26th.

Anniversary-wise, 40 years ago this month in 1976 the first Apple computer, the Apple I, was released. In the same month James Callaghan was elected prime minister and long-end  gilt yields were 15%.


Article first appeared in Money Observer

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The Stock Market in March

So, March. The beginning of spring. What can we expect from the stock market in this month? Historically, the average market return for the month has been 0.5%, and in 18 of those 31 years (59%) the month’s returns have been positive (although ­ as can be seen in the accompanying chart ­ the recent record has been weak: down four of the past years). This record ranks March seventh in the performance ranking of calendar months for the market.

Monthly returns of FTSE All Share Index - February (1984-2015)

 

The average March

The general trend for the market in March is to rise for the first three weeks and then fall back in the final week – the last week of March has historically been one of the weakest weeks for the market in the whole year.

Mid-cap v large-cap stocks

But the month tends to be good for medium-cap stocks ­ at least relative to large caps. March marks the final month of the three-month period when the FTSE 250 strongly out-performs the FTSE 100 (in March on average the FTSE 250 has out-performed the FTSE 100 by 0.9 percentage points).

Sectors

The sectors that tend to be strong in March are: Aerospace & Defense, Financial Services, General Retailers, Industrial Engineering, and Oil & Gas Producers, Oil Equipment. While weak sectors have been: Gas, Water & Multiutilities, Health Care Equipment & Services, and Nonlife Insurance.

Aside from stocks, March has often been a weak month for gold and a strong month for oil.

FTSE 100 quarterly index review

The results of the quarterly FTSE 100 index review will be announced on the 4th; it’s difficult to predict these things too far in advance, but at the time of writing Sports Direct looks a candidate to be booted out and replaced by Rexam.

Diary

On the economics front this month we have the nonfarm payroll report on the 4th and the FOMC interest rate announcement on the 16th. It’s triple witching on the 18h, so be on the lookout for increased volatility on that day.

And it’s Easter on the 27th so the LSE will be closed on the 25th (Good Friday) and 28th (Easter Monday). A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.

Finally, maths geeks will be celebrating Pi Day on the 14th (in the American format the date is 3/14).


Article first appeared in Money Observer

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The Stock Market in February

February is currently on something of a roll. Since 2009 the market has been up every year in February. This is a far better record than any other month of the year. And, further, since 1994 the market has only seen significant negative returns in three years. Since 1970 the average return of the FTSE All-Share Index in February has been 1.6%, with the month seeing positive returns in 63% of years. There’s no obvious reason why the market has been so strong in recent years in this month; although one possible explication might be that, also in recent years, shares have been weak in January and so they experience a bounce back rally in February.

Monthly returns of FTSE All Share Index - February (1984-2015)

In an average February the market tends to rise for the first two-and-a-half weeks and then drifts lower for the rest of the month.

Mid-cap v large-cap

A feature of February is that, with January, it is the best month for mid-cap stocks relative to the large caps. Since 2000 on average the FTSE 250 Index has out-performed the FTSE 100 Index by 1.7 percentage points in this month.

FTSE 100 v S&P 500

On the international front, February is one of the four months in the year that the FTSE 100 Index has historically out-performed the S&P 500 Index, although the out-performance is attenuated once currency is taken into account as GBPUSD is historically weak in February.

Sectors

The strong sectors in February tend to be Chemicals, Construction & Materials, General Retailers, Household Goods, Mining, and Oil Equipment; while the weak sectors are Electronic & Electrical Equipment, Financial Services, and Technology Hardware & Equipment.

And it’s a busy month for analysts as there are more FTSE 100 results announced during the month than any other ­ 39 companies announce their prelims in February (as do 56 FTSE 250 companies).

Aside from shares historically this has been a strong month for gold and silver.

Diary

Dates to note this February are: 4 Feb ­ MPC interest rate announcement at 12 noon, 5 Feb ­ US Nonfarm payroll report, and 16 Feb ­ President’s Day (when the will be NYSE closed). The 15th of the month will see the 10th anniversary of the controversial flotation of QinetiQ. And, finally, 8 February is the Chinese New Year; this new year will be the year of the monkey. Since 1950 the average return in monkey years has been 7.3%.


Article first appeared in Money Observer

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The Stock Market in January

January used to be the strongest month in the year for equities. But, as can be seen from the accompanying chart, all that changed after the year 2000. Since then, January has been the second weakest month of the year with an average return in the month of -1.9%. Although the month is far better for mid-cap and small-cap stocks; on average since 2000 the FTSE 250 Index has outperformed the FTSE 100 by 2.0 percentage points in January

Monthly returns of FTSE All Share Index - January (1984-2015)

Historically the euphoria of December (the strongest month of the year) carries over into the first few days of January as the market continues to climb for the first couple of days. But by around the fourth trading day the exhilaration is wearing off and the market then falls for the next two weeks – the second week of January has been the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.

So, quite possibly a gloomy start to the year for shares.

But what is the outlook for the rest of the year?

The FTSE All-Share Index ended 2015 down 2.4% on the year. This was the second successive year the market has had negative returns. This could be bullish for the outlook for the market in 2016 as it is very rare that the market falls for three successive years (since 1960 it has only occurred twice: 1960-1962 and 2000-2002).

For further guidance we might look at the Decennial Cycle. This shows that since 1801 the average return of the FTSE All Share Index in the sixth year of the decade has been positive at 1.6%. And if one wants to consider the lunar cycle, we could look at the Chinese Calendar ­ in this 2016 will be the year of the monkey, and since 1950 the S&P 500 (for which we have the data) has returned an average 7.3% in monkey years.


Article first appeared in Money Observer

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The Stock Market in December

Towards the end of the year there seems to be an inverse relationship between the weather and the stock market. In December, as temperatures get colder, shares get hotter! Since 1970 the FTSE All Share Index has risen in 76% of all years with an average monthly return of 2.2%.

Incredibly, the index has only fallen four times in December since 1986, and in only one of those years was the decline significantly large. As it happens, the market did fall last December, in 2014, but this is worth mentioning as it is such a rare event. So, this all makes December the strongest month in the year for shares.

Monthly returns of FTSE All Share Index - December (1984-2014)

Given the general strength of the market in December, an odd feature of the month is that it has the weakest first trading day for any month in the year –average first day returns have been -0.07% with a probability of a positive return a lowly 45%.

The average December

After this first trading day, on average the market tends to increase gently in the first two weeks of the month, but then rises strongly in the final two weeks. Indeed, this is the strongest two-week period in the whole year, with the three strongest days of the year all occurring in this two-week period.

Santa Rally

This final spurt in share prices at the end of the year is sometimes called the Christmas, or Santa, Rally. Although there is no common agreement on exactly when the rally starts – some say it covers the whole of December, others (and the data tends to back this up) say it just covers the final two weeks of the year. In recent years there has been some sign that shares have started rising as early as November in anticipation of the Christmas Rally.

Diary

December is a very quiet month for company results: only three FTSE 100 companies release their prelims (finals) in this month and three their interims, so a quiet time for company analysts.

Dates to watch this month are: 2 Dec – US Nonfarm payroll report, 15 Dec – MPC interest rate announcement at 12 noon, 16 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 24th and 31st and will be closed all day on the 25th.


Article first appeared in Money Observer

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The Stock Market in November

Of the 12 months of the years, market performance in November is only middling. Since 1970 the FTSE All Share Index has risen in 60% of years in November, with an average return over the period of 0.3%. This gives it a rank of 6th place for monthly performance. From 1980 its relative performance had been steadily increasing, but that trend reversed in 2006 – as can be seen in the accompanying chart, the market has risen only three times in November in the last nine years.

Monthly returns of FTSE All Share Index - November (1984-2014)

Sell in May

The significant feature of November is that it marks the start of the strong six-month period of the year (November to April). In other words, having reduced exposure to equities in May (”Sell in May and go away…”) investors should now be increasing exposure to the market this month (if they haven’t already done so in October).

The average November

On average the market tends to rise the first four days of the month, then to give up those gains over the following few days, rise again, fall back, until finally increasing quite strongly over the final seven trading days of the month.

Sectors

In the last twenty years the sectors that have been strong in November have been: Beverages, Fixed Line Telecommunications, Food Producers, Life Insurance, Media, Mining, Technology Hardware & Equipment and Travel & Leisure. While the weak sectors have been: Aerospace & Defense, Banks, General Industrials, and Oil & Gas Producers.

Shares

At the company level, the following FTSE 350 shares have performed best in November over the last ten years: Babcock International, Compass Group, Greene King, and Shire; the shares of these companies have all risen in November for nine of the past ten years. The shares that don’t seem to like November are: Tullett Prebon, Lloyds Banking, and CSR. And this is a busy month for interim results: 62 companies from the FTSE 350 make their announcements this month.

Elsewhere, November has been a strong month for gold and weak for oil and GBPUSD.

This is a busy month for interim results: 63 companies from the FTSE 350 make their announcements this month.

Diary

Dates to watch for this month are: 5 Nov – MPC interest rate announcement, 6 Nov – US Nonfarm payroll report, and 26 Nov – Thanksgiving Day (US), NYSE closed.


Article first appeared in Money Observer

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The Stock Market in October

October is a puzzling of months for investors. On the one hand it has a reputation for volatility – and this is well deserved. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October! The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And, additional bad news for investors: since 1970 the average return in the month has been just 0.3%, ranking it 9th of the 12 months. However, things have changed in recent years.

Monthly returns of FTSE All Share Index - October (1984-2014)

Although the market occasionally suffers large falls in this month (as can be seen in the accompanying chart), for the most part the market posts a positive return. In fact, in the last 23 years the market has only fallen five times in October – this is a performance only bettered by December. In recent years the market has posted an average return of 1.5% in this month (albeit with a very high standard deviation) – ranking it 4th for monthly performance.

But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.7 percentage points in October.

The average October

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month – with the last trading day (LTD) being the strongest monthly LTD of the year.

Sell in May

October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.

Diary

Dates to watch out for this month are: 2 Oct – US Nonfarm payroll report (anticipated), 8 Oct – MPC interest rate announcement at 12 noon, and 27 Oct – two-day FOMC meeting starts.


Article first appeared in Money Observer

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The Stock Market in September

September – the worst month of the year for shares! After the summer lull, things can get exciting again for investors in September. Since 1982 the FTSE All Share Index has on average fallen 1.0% in this month – the worst average return of any month in the year. And things haven’t improved recently: since 2000 the average return in September has been even worse at -1.8%. The probability of a positive return in September is 47%, which places it just better than that for June.

Monthly returns of FTSE All Share Index - September (1984-2014)

As well as poor average returns, the volatility of returns has been higher than any other month since 2000. Having said that, the market has actually risen in September more times than it has fallen since 2000 – it’s just that when the market does fall it tends to be a significant decline. This can be seen in the accompanying chart which plots the performance returns of the FTSE All Share Index for each September since 1984.

And the dismal performance in this month is not limited to the UK. The average monthly returns across 70 world equity markets are lowest in September; the month is the worst month for equities in 25 countries, and only the strongest in one country – Venezuela.

The average September

In an average month for September the market tends to gently drift lower for the first three weeks before rebounding slightly in the final week – although the final trading day (FTD) of the month has historically been one of the weakest FTDs of all months in the year.

But, however bad the month is for large caps, it is even worse for mid-cap cap stocks. On average the FTSE 100 Index out-performs the FTSE 250 Index by 0.7 percentage points in September – making September, along with October, the worst months for mid-cap stocks relative to the large-caps.

Shares

In the last ten years the five FTSE 350 stocks with the strongest performance in September have been: Diploma, Law Debenture, Polar Capital Technology Trust, United Utilities, and Dechra Pharmaceuticals. While the weakest stocks have been Premier Farnell, Pace, Compass Group, and SVG Capital.

Diary

Dates to watch this month are: 2 Sep – FTSE 100 Index quarterly review, 4 Sep – US Nonfarm payroll report, 7 Sep – NYSE closed (Labor Day), 10 Sep – MPC interest rate announcement, 16 Sep – Two-day FOMC meeting starts, and 18 Sep – Triple Witching.


Article first appeared in Money Observer

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