Doug Kass: Seasonality Is Important to Know, but Ridiculous to Trade By

Among the silliest exercises seen in the business media and relied upon by some stock market traders and investors are the “sayings” and shibboleths — like “Sell In May And Go Away,” the “January Barometer” or, as I have been discussing, the notion of end-of-year seasonality and the “Santa Claus Rally.

Speaking of the “Santa Claus Rally”…

Not only does FinTV spend an undue amount of time on this B.S. but, as noted by “Jazzy” Jeff Hirsch below, they don’t even know the proper definition of “The Santa Claus Rally.” It is the market’s performance during the last five trading days of December and the first two of January.

For those who still believe in this nonsense, below is an email that Jeff Hirsch (The Stock Trader’s Almanac) sent me last night.

Jeff concludes that indeed the Santa Claus Rally has occurred (+0.8%) and if equities move higher in the first five days and for the entire month of January there is a high probability that 2023 will be an “up year.”

Good luck with this correlation (!) and thanks to Jeff Hirsch:

Defined in the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the propensity for the S&P 500 to rally the last five trading days of December and the first two of January an average of 1.3% since 1950. This indicator was discovered and first published by Yale Hirsch in the 1973 edition of the Almanac.

The lack of a rally can be a preliminary indicator of tough times to come. This was certainly the case in 2008 and 2000. A 4.0% decline in 2000 foreshadowed the bursting of the tech bubble and a 2.5% loss in 2008 preceded the second worst bear market in history.

It was a choppy ride this time around, but the S&P 500 found some footing today and finished the current seven-day trading span defined by the Santa Claus Rally with a 0.8% gain. Including this year, Santa has paid Wall Street a visit 59 times since 1950. Of the previous 58 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 31 times. When all three indicators were positive, the full year was positive 28 times (90.3% of the time) with an average gain of 17.5% in all years.

A positive SCR is encouraging, and further clarity will be gained when January’s First Five Days Early Warning System (page 16, STA 2023) gives its reading later this week and when the January Barometer (page 18, STA 2023) reports at month’s end. A positive First Five Days and January Barometer would certainly boost prospects for full-year 2023. The December Low Indicator (2023 STA, page 36) should also be watched with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022.

Seasonality is important to know, but ridiculous to trade by. In the absence of hard-hitting analysis and rigor, the media and traders will rely on faux indicators as a crutch.

My advice? Ignore them.

For me, I would always prefer to wait for the right pitch — when reward vs. risk is favorable — than rely on the worn and tired market “sayings” and shibboleths.

Here is my rejection of the idea of seasonality and the other silly market sayings from a month ago:

Dec 08, 2022 ‘ 08:59 AM EST DOUG KASS

Seasonality? Bah Humbug!

* The business media and financial TV are inundated daily with talking heads who confidently deliver, as a rationale for being bullish, the non-rigorous notion that seasonality will save the markets in December

As I quipped recently, imagine an intelligent civilization from another galaxy analyzing our actions and saying these people actually make investing decisions based on what day it is?

Analysis of Averages Leads to Average Analysis!

Along these lines, this morning I wanted to repost an important chart on seasonality (recently passed on to me by CNBC’s Carl Quintanilla).

As noted below, in the years that the S&P 500 Index was down 10% or more for the 11 months that ended in November, equities failed to launch a Santa Claus rally:

My prior column (written three weeks ago) on the silliness of seasonality follows:

Nov 21, 2022 ‘ 08:15 AM EST DOUG KASS

Avoid Market Shibboleths Like the Importance of Year-End Market Seasonality (and Strength)

* Where is the seasonal strength in stocks?

* Seasonality is important to know, but ridiculous to trade by

* For me, I would prefer to wait for the right pitch (when reward vs. risk is more favorable) than rely on non-rigorous B.S. and market “sayings” and shibboleths.

On Thursday I suggested that it appeared that almost every “talking head” in the business media, when asked about the near term outlook for equities, reached to the argument of and gives weight to the notion of seasonal market strength.

But I really wanted to say that this particular part of the bullish short-term argument for stocks, especially in the face of a turn lower in the profits cycle (Target (TGT) , Micron (MU) , etc.) and these uncertain and volatile times, is totally B.S.

Like other shibboleths (like Sell in May and Go Away), putting any serious weight on seasonality is nonsensical and non-rigorous.

Seasonality is important to know, ridiculous to trade by. Since it has become common knowledge over the years it has set up some good trades in fading it as it is too widely bought early.

Here is what I wrote on the subject last Monday:

Nov 14, 2022 ‘ 03:15 PM EST DOUG KASS

The Right Pitch

It is hard for me to see the market put on a new leg higher with the two-year US note yield gravitating up again today (by +8 bps to 4.41%) – and, for that matter, anywhere near today’s yield.

This risk free rate of return seems an attractive alternative given the wide range of possible economic and market outcomes.

The bullish argument in the business media today and late last week seems to be heavily tilted towards the notion of strong seasonality over the balance of the year. I heard this on every show in today’s trading session.

Sure this view might be right, but sorry, and quite frankly, that is not a particularly (analytically) rigorous reason to increase long exposure.

Though I am often wrong (and always in doubt), this might be another time…

But I am willing to be patient and wait for the right pitch.

(This commentary originally appeared on Real Money Pro on Jan. 5. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass’s Daily Diary and columns each day from Paul Price, Bret Jensen and others.)