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The Bear Rides Again?


Rally now looks like a major short squeeze - not a new bull market.

Looking at recent GDP numbers -- which were awful, though many took comfort in the apparent rise in consumer spending -- one must ask: Have Americans gone back to their old ways?

Sell in May and Go Away?

My friend and South African business partner Prieur du Plessis recently updated a chart on monthly stock-market returns since 1950. It clearly shows that the November through April periods have, on average, been superior to the May through October, half of the year.

And the difference is quite significant. As Prieur notes, the "good" 6-month period shows an average return of 7.9%, while the "bad" 6-month period only shows a return of 2.5%. Of course, selling creates taxable events, which can hurt your returns.

Additionally, you never know when the markets are going to go down, and when they'll be up. There can be a lot of variance from year to year. For instance: In 2007, the markets were up during the summer by 4.52% and down during the "good" period by -9.62%, which is opposite the average pattern. Of course, the markets did go down by 30% after May 1 last year and down another 5% since then. That's what bear markets can do.

This caused me to wonder: The last 59 years have seen 2 significant secular bull markets (roughly 1950-1966 and 1982-1999) and 2 secular bear markets (1966-1982 and 2000-present). I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur. When I came in the next morning, I had my answer: It made a significant difference. May through October in secular bear cycles has been ugly. Look at this graph:

And just for fun, let's look at the monthly numbers since the present secular bear market began in 2000. So far, this has been a lot worse than the 1966-1982 cycle, although we haven't yet had the recovery phase from the current doldrums - which will likely make the overall numbers look better in 4-5 years.

As noted above, these graphs simply give us past trends, not an absolute forecast. But they do provide food for thought. There are times when you should be cautious and times when you should throw caution to the wind. I think this is the former. While some pundits are talking about green shoots and the second derivative of growth, this economy may be worse than their rosy forecasts of the end of the recession, as we we'll see in a few paragraphs.
No positions in stocks mentioned.

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