EDMOND — Tis the season again. Well, almost anyway. No, not that season. The season of the stock market when you need to come back. Last April I wrote a column about an old Wall Street saying that says “Sell in May and go away.” (See “Is this the Beginning of the Selling Season?” April 16, 2011, The Edmond Sun.) Then you’re supposed to come back and buy again in November. Does it really work? Not always, but more yes than no.

The market has a proven tendency to make most of its gains between November and May, and it experiences most of its losses in the remaining months.  Obviously, a positive market move does not begin and end on the same day each year. That’s just the general time frame. Some people dismiss the idea as an interesting theory that doesn’t always work. But it’s not a theory; it’s a proven fact. In spite of the few years when it has not worked, investing over the long-term based on the market’s seasonality significantly outperforms the market, and with much less risk.

In that column I suggested that while it doesn’t always work, 2011 was setting up to be a classic example of being one of those years that it would work. Now, a little more than five months later, we know that it worked very well this year.  After the S&P 500 hit a high for the year up about 9 percent in April, we are now down about 11 percent for the year and down 20 percent from the highs. People are quite worried. If only we had known for sure, most people would love to have a do-over and sell everything back in May. Unfortunately, life and markets don’t work that way. Congratulations to those who had the courage to sell or hedge their portfolios.

The big question now is what will happen in October (statistically the worst month for the market) and then in November, when the theory says you should buy again? Of course, I don’t know for sure. Nobody does. But I’m inclined to think that we’re setting up for it to work again, at least for awhile.

The year has been going pretty much as expected. If it continues that way, it means more bad news for awhile, but eventually good news. The first part of the sell theory continues to play out. We are now in a significant market correction and probably a bear market (down 20 percent or more). All 12 of the world’s biggest economies are in a bear market, with declines of up to 35 percent, and no signs their declines are over. The U.S. market just hit the 20 percent down mark. Will we be the only one to buck the trend? I doubt it.

There is some good news, though. I think this correction is going to be followed by a substantial rally off the lows to produce a positive year. Not a new high, but a small number with a plus sign in front of it.

Why? While the economic slowdown in the U.S., and the European debt crisis, continue to worsen, and the downside target on this correction is still quite a bit lower, some of the serious negatives have begun to reverse. Investor sentiment, which just six months ago was at an extreme of confidence and bullishness, is moving toward the level of despair and bearishness seen at important lows. It’s not quite at extremes yet, but one more big sell-off will put it there. When sentiment hits extremes, either positive or negative, there is often a reversal not long afterwards.

The Economic Cycle Research Institute recently notified its clients that a recession is now unavoidable, saying, “The vicious cycle is under way where lower sales lead to lower production, which leads to lower employment, which leads to lower income, which leads back to still lower sales, and the cycle feeds on itself.”  While I agree with them to some extent, I don’t think recession is in the cards for 2011. For now, corporate earnings are still pretty good, but 2012 is another story though.

Even though the U.S. economy is limping along at stall speed, there are signs of improvement in some areas, and we are seeing consumer spending picking back up in some sectors. This is likely a temporary phenomenon, but it might be enough to see a slight improvement in GDP for the fourth quarter. Unless there is a complete meltdown in Europe, which is not likely yet, this might be enough to cause the year-end rally that seasonality would predict. If Europe blows up this year, all bets are off. We shall see.

While no one can be certain, if I had to guess I think the market will break to lower levels sometime in October, possibly as low as 10,000 on the Dow and 1,040 on the S&P 500, and find the low for the year there. That could be the buying opportunity for the year-end rally. If it doesn’t break, the buying opportunity will be at current levels.

What should you do now? If you are still invested in the market and haven’t been scared out yet, unless you are a very nimble trader and willing to get out and back in again quickly, it’s too late to do anything now. Ride it out and re-evaluate at the end of the year or early 2012. If I’m right, you’ll be glad. If I’m wrong, most of the damage has been done already and it won’t matter.

Seasonality could be even more important this year than in other years. So, will this strategy work again this November? I think maybe yes. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.