Random-walk theorists tell us that the stock market meanders randomly and can't be timed. Efficient-market theorists claim that all the information that will affect the market is already accounted for by today's stock prices. Wall Street continually warns investors not to try to time the market. "It can't be done," the naysayers assert. If they're right, the only alternative, other than avoiding the stock market altogether, is to buy and hold.
But unfortunately a buy-and-hold strategy guarantees that investors will suffer not only the next bear market, but also every future bear market, too. Not much fun, considering that, over the past 100 years, there have been 22 bear markets, each lasting an average of 15 months and bringing declines of 36.3 percent.But there's another way to play the game, according to Sy Harding's Street Smart Report newsletter. That's to time the market through a simple strategy that has produced sparkling results over the past century. Two simple principles underpin Harding's concept.
First, the market tends to make most of its gains between November and May each year and then usually enters the doldrums between May and November.
Why is this so? Because investors usually receive extra cash between May and November -- from sources such as year-end bonuses and distributions, corporate contributions to profit-sharing plans and income-tax refunds. When the extra dollars stop pouring in, Wall Street slows down until the following October, when the cycle begins again.
Second, according to Harding, the market tends to gain ground from the last trading day of each month through the fourth trading day of the following month. This phenomenon also seems linked to cash-flow bulges, as many high-income individuals receive their paychecks monthly, rather than weekly.
Combined, the two patterns mandate entering the market on the next-to-last trading day of every October and exiting on the fourth trading day each May, says Harding.
"Since 1964, had an investor followed this simple mechanical procedure, the resulting gains would have almost doubled the Dow's. Furthermore, the seasonal investor would have accomplished this with only half the risk, since he or she would have been exposed to the market only six months each year."
Using Harding's Seasonal Trading Strategy would also have kept investors out of the 1987 crash and the 1990 bear market, both of which took place during the unfavorable May-November stretch. It would even have helped them avoid the great crash of 1929.
Right now, his timing strategy has Harding out of the market. He won't know whether he'll get back in until the end of October nears. Will his strategy continue to work? There's no reason why not, concludes Harding.
"It just might be more important to be a seasonal investor than a seasoned one."
Sy Harding's Street Smart Report, 169 Daniel Webster Highway, Meredith, NH 03253; bimonthly, $225 annually.
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