Wall Street closed out February on a brutal note ... with a 315 point decline in the Dow Jones Industrial Average capping off a four-month losing streak in stocks and sounding some alarm bells for those observers who keep a sharp eye on stock market charts. What this means for you and me is that we should be ready for more wild rides on Wall Street and, likely, no quick end to the turmoil on Main Street.
Consider the following from my friend, Phil Roth, a chart-gazer from the Wall Street firm, Miller Tabak. There has been only one other instance since 926, in addition to the last 4 months, when the market has fallen, consecutively, from November through February. That was in 1940, when World War II was intensifying in Europe and just before the U.S. became fully involved.
It's a rare occurrence when the market declines from late fall to early spring. Typically stocks bottom out in the September/October period and rise until April. There are a variety of historical influences that have created those patterns and the patterns have asserted themselves quite regularly over the last many decades.
Traders and investors, who have followed those patterns, have had great success timing their market buys and sells. And, those seasonal factors have led to such Wall Street axioms, like "Sell in May and Go Away," and "Sell Rosh Hashanah and Buy Yom Kippur."
The "Bespoke Investment Group" notes that, since 1900, there have been a total 23 periods, including the most recent one, in which stocks declined for four months in a row. One month later, the average performance for the market was another half-point decline. In the next three months, stocks advanced only 54.5% of the time, while over the course of the next six months, stocks managed to rally only 64% of the time.
In other words, March may come in like a lion on Wall Street and go out like one too.
And to add insult to other seasonal injuries, this year, very few seasonal factors, if any, are working. Not only have stocks not provided the late fall to early spring rally that accounts for a goodly portion of the market's yearly gains, but other market cycles are failing us as well.
The presidential cycle, which measures market performance over the lifecycle of executive leadership, shows that the stock market, historically, does best in the third and fourth years of a president's term.
The average gain in year three (that would have been 2007) is just under 20%. In 2007, stocks gained about a third of that, owing to all the fallout from the real estate recession and credit crisis on Wall Street.
In the fourth year of the cycle, gains usually hover around 8%. So far this year, the market is down close to 10%, in just the first two months!
The break with seasonal tendencies can be worrisome, since it makes predicting subsequent seasonal patterns even more difficult.
As a side, but important, note, when the stock market declines early and sharply in an election year, it offers an ominous portent to the White House incumbent, or to the incumbent party. Since, for the first time since 1952, there is no actual incumbent running for president, it's hard to draw an exact parallel to previous election cycles. However, suffice to say, a weak stock market and a weak economy, puts added pressure on the incumbent party to prove its net worth to the nation.
The unusual behavior of all the financial markets should tell us that something wicked this way comes. And that's important for the average investor, the professional trader and, quite frankly, the next president.
And while statistics cannot tell us everything we need to know about what will happen in the future, (as they say on Wall Street, "past performance does not guarantee future results,") the recent past performance of this stock market leads some to believe that Wall Street will become a rocky road, at least until some enlightened policy-makers find some insightful ways to re-pave both Wall Street and Main Street with gold ... or better yet, if you're trading commodities, platinum!