holy moly --- Mayday may signal start of yearly slump
uniontrib.com
May 2, 2002
Happy Days Are Gone Again.
We have entered another blue period, when, historically,
stocks have not done well for six months. (If it's any
consolation, Picasso was struggling financially during his
blue period, 1901-1904, but now his paintings from those
years are worth fortunes.)
Alan M. Newman, who edits the H.D. Brous & Co. Crosscurrents
newsletter from Great Neck, N.Y., calls May through October the Dead
Zone. Since 1950, the Dow Jones Industrial Average has barely inched
up at all (rising less than one-tenth of one percent each year) in the
period from May 1 to the end of October.
By contrast, the Dow has gone up 15.9 percent a year from Nov. 1
through April 30.
Since 1950, if you had invested $10,000 only in November through
April, you would have made $465,472. But if you invested $10,000 in
the May-October period, "you would have gained less than $1,151,"
says Newman.
Historically, there has been virtually no gain in the Dead Zone period,
he says. There are several reasons why the November-April period is
remunerative, he says: People anticipate year-end bonuses and invest
money in advance; then the bonuses come early in the year and more
money goes in; tax season brings more consciousness of Individual
Retirement Accounts, and the like.
In the current market, from Nov. 1 through Tuesday, the Dow moved
up 9.6 percent, but the Nasdaq actually went down a hair and the S&P
500 crawled up slightly. So the normally upbeat period was somewhat
lackluster, despite the inordinately depressed lows of September from
which stocks ascended.
The Old Tappan, N.J.-based Stock Trader's Almanac Investor has followed
its "Best Six Months" system for years, and it corresponds closely to
the calendar system constructed by Crosscurrents.
The idea is the same: Almost all gains are between November and
April, and the market is weak between May and October. The
difference is that under this system, the trigger signaling a good or bad
six months is flexible.
For example, the trigger on the bad period may come any time from
the first trading day in April until mid-June, says Jeffrey A. Hirsch,
editor of the newsletter.
Under this system, since 1950, the $10,000 investments would have
led to a $5,977 loss in the worst six months and a $1.2 million gain in
the best six months.
The bad news is that this year, the sell signal was triggered on April 2,
says Hirsch, even though most of the normally positive month of April
was still ahead.
Hirsch worries that the popular averages will test their September
lows during the worst six months this year.
Newman believes that this year's Dead Zone may be one of the worst.
There have been nine periods since 1950 in which stocks have
dropped 10 percent for two straight Dead Zone years, he says.
Until now, there have never been plunges of that magnitude three
years in a row. "The scene is now set for such a circumstance," warns
Newman. "If the current bear market plays out anywhere near like it
did from 1966-1982, the Dead Zone will provide a very costly
experience for investors."
Money plunked into stocks during Dead Zones in those 1966-1982
years dropped 54.2 percent without inflation adjustment, and 84.6
percent adjusted for inflation.
"Consider that when the folks on Wall Street tell you to be invested all
year 'round," says Newman.
Richard Russell of La Jolla's Dow Theory Letters puts only some credence
in these predictions. "I hate to use repetitive observation on what is
going to happen," says Russell – another way of saying that history
doesn't really repeat, or past performance is not necessarily any guide
to the future.
"My feeling is that there will not be any good six months for awhile,"
says Russell. Therefore, you shouldn't rush back into the market on
Nov. 1. This is a primary bear market that could last three or four
years. Stocks might not be a value until "blue chips are selling at ten
times earnings and yielding 5 to 6 percent," he says.
That could be at Dow 3,000, he says. There will be lots of blue periods
ahead if that's true. |
