The Tycoon Report

Statistcally, this is the worst time to invest each year. Find out why.

Thursday, August 17, 2006 | Chris Rowe

Okay folks, here we are.  Looking at the end of August, which is fast approaching, and what usually happens at this time of the year?  

The market usually cracks to the downside, setting up for a major seasonal reversal to the upside which usually takes place in October.  

We recently talked about the fact that historically, mid-term election years have shown the weakest stock market performances.  This is important to keep in mind since we are in a mid-term election year, but equally as important is the valuable knowledge that pre-election years (like 2007) typically show the strongest performance - BY FAR.  

Of course this isn't guaranteed to happen but it's important to understand what the biggest, smartest, oldest and wisest money on the street is used to, and therefore thinking about, as they move trillions of dollars around.  The general mood just might affect the market this time around too!  

Let's look at the history books for some more quick and dirty statistics.  (I love this stuff.)  

Ever hear the term "sell in May, go away?"  If you don't know what that means, I encourage you to just take a gander at a 1-year chart of the S&P 500 (or any other major index.)  You may notice that the absolute top was hit the week ending May 12.  

After bouncing off of the 200-day moving average, the market came up for some air (June 2,) and that was the last time that the market was that high.  

Of course, you could have made a killing if you had played your cards right over the last couple of months based on the huge volatility.  But then again, that is if you were a trader (like us.)  I'm sure most of you have some trading capital, and some investment capital.  

My point is that we are currently in what is USUALLY the "worst time" of the year for the stock market bulls, and we are also in the worst year of the four-year "election cycle" for the bulls. 

That doesn't mean that you can't make big money these days.  It simply means that you should make a killing on stocks or markets that trade lower.  You can do this by buying put options, or selling stocks short.  (I personally would rather buy puts.)  

Some of you have been in the market for years or decades.  I have one member who e-mails me who I'm convinced has been in the market for centuries.  

Some of you still learn the same lessons over again after decades, and some of you may just be relatively new to the market.  Pay close attention (no matter who you are,) to these statistics, and pay extra close attention to the mid-term year (which we are currently in) and  

then the Pre-Election year.  In the 4-year cycle, the largest market gains have been from the Mid-term low to the Pre-Election year top!  

The Election Year Cycle: 1971-2003 Average Gain/Loss Per Year  

Again, notice that on average, the mid-term year performs the WORST and actually averages a loss.  Also notice that the largest gains on average (BY FAR) are shown in Pre-election years.  

Now I know what many of you are thinking:  I wonder how the HUGE stock market loss in 2002, and the HUGE stock market gain in 2003 has affected these statistics.  

Well without boring you with too much detail, I will answer the question.  

Yes, those extreme times have affected the above statistics, but in my article in The Tycoon Report last Thursday, I told you that since 1914, the Dow Jones has gained an average of 50% from the mid-term low, to the pre-election year high.  As a matter of fact, the smallest gain was 14.5%!  

So this is obviously a trend that existed way before the recent 2002-2003 bear market bottom was factored into the above statistics...  

Still not convinced that this pattern exists?  Well, I'll give you some more proof.  Check out the percentage of profitable months in the same time period below (1971-2003):

Percentage of profitable months

Did you notice the performance of the mid-term election years?  

Here's a side note as long as I'm on the subject: The Nasdaq composite tends to reach its bull market maximum strength peak before the other major indices, and tends to turn to the downside first as well.  

Oh, I'm not done yet.  I'm just getting warmed up here ...

If you do not have any bearish exposure and have a stock or options portfolio with 100% bullish positions, then you may not want to read this next part.  But if you want to make a few of the smartest trading moves that you will make this decade, you should really focus here.  

You can make these next few months, some of the most important months in terms of positioning yourself for the blast off from the 2006 lows to the 2007 highs.  

Okay, we started this article talking about the saying: "sell in May, & go away."  Usually, May - October are the worst months to remain in long positions with no activity.  We know we can make money trading, but I'll stick to the point here.   

What if this time around is no different than every mid-term election year for nearly a century?  When are we most likely to see the big selloff, before the massive gain (from mid-term low to pre-election year high) starts?  

Check out the table below.  It happens to illustrate the performance of the Nasdaq, but all of the major indices would show a similar picture.  

Which month has been the worst performing month of the year?   

(Hint: I'm trying to tell you this BEFORE it happens.)  

Nasdaq Monthly Performance from 1971 – August 2004 

Answer: September  

So from 1971 – August 2004:  

~ On average, the Nasdaq returns 8% from November 1 - January 31.  
~ On average, the Nasdaq returns 3.4% for the remaining 9 months  

(February 1 - October 31) combined.  
~ On average, the Nasdaq LOSES 0.4% July 1 - September 30.  

GREAT!  

We now understand The Election Year Cycle, and the effect of the 12-month cycle.  I haven't told you anything today that the people who literally control the major stock market movements aren't currently thinking about.  

Look, gang, I'm not saying that I have a crystal ball.  But since we know that September is typically the worst-performing month of the year on average, we know that now is a great time to own put options on ugly stocks so you can profit big if the market does sell-off.   

The best part is that (as you can see above) November-January is by far, the strongest period  for the market.   

So what should you do?  

Take some bearish positions on stocks that would probably have a hard time trading higher no matter what type of market we are in.  

I've got a list of stocks that I have had my eye on that I believe are going to make us insane money over the coming months.  

I already know certain stocks that I am about to go negative on.  I feel like I am almost certain that these stocks will simply trade lower, or get absolutely crushed.  You should get your list together, too, and profit from it.  

I also have several stocks in mind that I think are going to explode after the market bottoms out this year.  I can't wait!  

I think that the next 12 months are going to present us with some of the biggest money-making opportunities that we are going to have a chance to get in on in a LONG time.  

I hope that I have helped at least one of you readers make serious money, or at least think twice about what to do to protect yourself from serious losses.  

“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider