Is there anyone on the planet who has not heard old stock market saws like "Sell in May and Go Away" or "Bull Market Bashes End With October Crashes"?
Unfortunately for trusting investors, frequent repetition and high accuracy do not always march arm-in-arm. Prices rise in May to October half of the time over the long-run. Despite the headlines of 1929 and 1987, history teaches October is more likely to mark the end of a bear market, not the beginning of one.
Objective analysis often finds some kernel of truth that triggered the rhyme in the first place. But these kernels are often too general to apply at any single moment in time.
One exception to the rule is the old adage about the Father Christmas rally. Fact and fantasy do march arm-in-arm for a change. This old wives' tale does stand up to rigourous statistical analysis.
But it does not always pay to rush into shares to catch the rally. History teaches the stock market often disappoints investors at the beginning of December and then takes off like a rocket as mid-month approaches.
The period from December 2 to 10 is traditionally the weakest part of the month. Prices rise about half of the time.
Trends like this tell us nothing about prospects for 2005 of course. They also say nothing about prospects for individual days such as December 2 or December 10. It could be, for example that shares rally strongly at the beginning and end of the period but dip in mid-period. Even so, history clearly indicates the Christmas Rally often does not begin during this portion of the month.
Important trend changes appear as mid-month approaches. There are no guarantees for any single year of course but history teaches stock market prices rise from December 11 to January 5 80 per cent of the time. It is a trend that has run for many decades.
These profit odds have improved in recent years. Since 1982, the year-end bounce occurred in 20 of the last 23 years, an 87 per cent success rate. The average profit was a whopping 2.72 per cent per cent per year. This translates to about 150 points on today's FTSE-100.
No surprises for guessing the long-term odds of a year-end bounce are higher in bull markets (84 per cent) than bear markets (68 per cent). But in either type of market, history teaches you can shade the profit odds a bit more in your favour by monitoring stock market swings in the prior 15 trading days.
Over the long-run, the likelihood of a end-year rally was highest when prices rose or fell moderately in the 15 trading days prior to December 11. The best profit odds of all followed price swings within the range of -1.01 per cent to +3.05 per cent.
There were 28 occasions since the mid-1930s when prices shifted within this range. Shares rose from December 11 to January 5 in 26 of those years, a 93 per cent success rate. In the world of stock market investing, these are superb profit odds.
Losses in excess of -1.01 per cent were followed by year-end gains 76 per cent of the time. The worst profit odds of all were associated with a big gain in the prior period. But even here, prices rise almost two-thirds of the time.
Will 2005 follow the norm? We shall soon see. Note that the 11th lands on a Sunday this year. The FTSE-All Shares index closed at 2765 on Friday, November 18. It might be worth jotting down this figure and calculating the percent change 15 trading days later on Friday, December 9.
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