For Stocks, Calendar Can Guide--to a Point

If the calendar were your only guide, the question of whether to buy, hold or sell stocks right now would be a no-brainer.

December has generally been the blue-chip Standard & Poor’s 500 index’s best month of the year since 1950: On average, the index has gained 1.8% this month over the last 50 years, according to the just-published 2002 edition of the Stock Trader’s Almanac.

The market’s propensity to rise in December, along with its tendency to advance in November and January, mean Wall Street is in the middle of what historically has been its best three-month stretch.

November more than lived up to its reputation as a good month for stocks: The S&P; index surged 7.5% last month as the market continued to rebound from the three-year lows reached after the terrorist attacks. The Nasdaq composite soared 14.2% in November, ending Friday at 1,930.58, and the Dow industrials gained 8.6%, closing last week at 9,851.56.

As veteran investors know all too well, however, seasonal market patterns can tell you whether the odds favor an advance or a decline in a particular index over a particular period, but they aren’t a sure thing. If they were, investing would be the easiest game in town.

What’s more, the trend in the S&P; 500 or other indexes isn’t necessarily the trend in the stocks or stock mutual funds in your personal portfolio.

Still, you could have done a lot worse in the last half-century than to keep an eye on the calendar when making decsions about your investments.

That is the main focus of the Stock Trader’s Almanac, an entertaining and data-packed 190-page investing guide and calendar published annually for the last 35 years by the Hirsch Organization of Old Tappan, N.J. (For more information, go to https://www.stocktradersalmanac.com on the Web. Or write to Hirsch at P.O. Box 2069, 184 Central Ave., Old Tappan, N.J. 07675-9069. The 2002 guide costs $29.95, plus shipping and handling.)

The almanac shows that it has been most profitable to be in the market between Nov. 1 and April 30, then out of the market from May 1 to Oct. 31.

Between 1980 and last spring, the almanac says, 76% of the time the Dow Jones industrial average produced a better return in the Nov. 1-April 30 period--meaning either a higher net gain or a smaller loss--than in the preceding six-month period. The pattern also holds going back to at least 1950.

Exactly why the market usually performs better in the November-April stretch remains a matter of conjecture. The classic explanation has been that investors by year’s end begin to look with optimism toward the new year, a state of mind that continues past Jan. 1 and into the spring.

In other words, if things have been going well in the economy, investors anticipate that the trend will continue, or even improve. If things have been going poorly, many investors by year’s end tend to think the situation can only get better in the new year. Americans, after all, by nature lean toward optimism, and the approach of a new year is as good a reason as any to believe in a better tomorrow.

In any case, the idea of staying away from stocks from May through October may have gained more converts this year, given what transpired. The Dow plummeted 15.5% between April 30 and Nov. 1. The S&P; 500 tumbled 15.2% in the period and the Nasdaq composite dived 20%.

This year’s market also has reinforced another well-known seasonal trend: September typically has been stocks’ worst month of the year. Between 1950 and 2000, the S&P; 500 index’s average September change was a loss of 0.4%, according to the almanac.

This year the index slumped 8.2% in September, crushed by the selling that occurred when the market reopened after the terrorist attacks.

October often is remembered as the market’s worst month because it hosted the two major crashes of the last century (in 1929 and 1987). But in fact, the average S&P; index change in October over the last 50 years has been a gain of 0.7%, the almanac notes.

What’s more, the S&P; index has posted a net advance in more than half of the Octobers since 1950. By contrast, the index has advanced in just 40% of the Septembers since 1950.

With December here, and many investors understandably nervous about the market’s ability to hold on to, or extend, its strong gains since Sept. 21, history is squarely on the side of the bulls: Not only has December been the S&P; index’s single best month of the year, but the index has risen this month 76% of the time since 1950.

All of this suggests that, if you have the inclination and the time, trading the market according to its historical patterns can be profitable.

But realistically, most people don’t have the inclination or the time. And that may be just as well, because the risk is that seasonal patterns can go awry for extended periods--or just in the period when you personally need them to work.

A glaring case in point: The “January barometer,” which holds that the market’s performance in January dictates its performance for the year, looks like a bust this year, barring a stunning rally this month.

After tumbling 10.1% in 2000, the S&P; 500 index rose 3.5% last January, boosting hopes that the bear market had ended.

Instead, the January rally gave way to another plunge in share prices in February and March. Year to date the S&P; index still is down 13.7%. It would have to rise 15.9% this month just to get to break even for the year.

How unusual is it for the January barometer to be wrong about the year? Since 1950 it has failed to correctly signal the full-year’s trend in just nine years. This year would be the 10th such instance. That still would leave the barometer with an 80% success rate, but it may be little comfort to someone who made a huge stock market bet on Feb. 1 of this year because of January’s gain.

Similarly disturbing to calendar traders is that the historical trend of better market performance between Nov. 1 and April 30 than between May 1 and Oct. 31 failed to hold true between spring 2000 and spring 2001.

The Almanac shows that the Dow index gained 2.2% between May 1 and Oct. 31, 2000, then lost 2.2% in the following six months. The S&P; fell 1.6% in that May 1-Oct. 31 period, then plummeted 12.6% in the following six months.

Perhaps one of the biggest tests of historical trends now looms. The almanac notes that over the last 40 years, the stock market has almost always made a major bottom in midterm election years--that is, the second year after presidential elections. That was true in 1962, 1966, 1970, 1974, 1978, 1982, 1990, 1994 and 1998, all of which saw important market lows that gave way to powerful rallies.

Yale and Jeffrey Hirsch, who publish the almanac, believe the market bottoms in midterm years because investors begin to bet that the sitting president will get serious about boosting the economy to ensure his reelection two years out.

For the midterm “rule” to hold true in 2002, however, the current market rally will have to crumble to new lows next year--not a pleasant thought for investors who want to believe that the worst is over.

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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to www.latimes.com/petruno.