ChartBrief #10 Equity Market Seasonality

The graph above charts theS&P500in 2016 against its historical seasonal pattern (from 1990 to 2015) by business day.  Looking at the path of 2016 it matches up pretty well except for the February global growth scare, and the Brexit blip in June. If it continues to match the historical pattern then it will be cruising for a circa 5% drawdown by mid-October.  I can point to any number of catalysts that could drive it (and I can also think of things that could cause this year to be an exception to the historical pattern – more on that bit later).  So while it’s just one factor, it is something to think about.
The other chart is the flip-side of the equity market; the volatility index, or equity risk.  The CBOE Volatility Index (VIX) also displays seasonality – much in the same way as the equity market does.  This should be expected because the biggest explanatory variable for the level of the VIX is the rolling 21-day realized volatility of the equity market.  The seasonal pattern is that the VIX is generally lower in the first half of the year; particularly Q2, and then trends up to climax in early October.  So while the recent flare-up in the VIX is now over, we’re not out of the proverbial woods just yet.

The final point to note is the folly or fallibility of seasonality.  Averages can and do deceive – and historical averages have a particular knack of deceiving.  That is, keep this seasonality in mind, but add it to your overall mosaic of market analysis.  If negative seasonality lines up with other reasons to get bearish then you will want to run cautious positioning and consider downside hedges.  But if seasonality is the sole factor it would pay to think about the level of conviction you would allocate to it…
In any case, I just thought it was worth pointing these charts out as the way they’ve tracked the seasonals so far this year has been quite uncanny.
Bottom line:While markets have calmed back down since the recent selloff, the historical seasonality remains negative and points to more volatility in the short term.

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Michael Mauboussin: Here’s what active managers can do

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More


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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.