Summer Rally? Whassup with that?
The other day during my almost daily jog, I was musing to
myself (I don”t use a walkman for artificial musing) about the
term, “summer rally.” A few weeks ago, when the Nasdaq
registered its spectacular 19% return, and the Dow Jones and
S&P 500 gained 5 and 7 percent, respectively, for the four-day
period May 30-June 2, you heard cries of, “This is the start of the
summer rally!”
Well, what is a summer rally and is it really a misnomer? Check
this out, sports fans.
“Such a big deal is made of the ”summer rally” that one might get
the impression the market puts on its best razzle-dazzle
performance in the summertime. Nothing could be further from
the truth! Not only does the market ”rally” in every season of the
year, but it does so with more gusto in the winter, spring, and fall
than in the summer.”
–Yale Hirsch / “The Stock Trader”s Almanac”
Well, whaddya know? According to the inestimable Mr. Hirsch,
”winter” is the best season for rallies, with a 14.0% average one
in the Dow Jones for the period 1964 through 1999. The other
seasons, in descending order, spring, fall and summer, have
average returns for their rallies of 10.5%, 10.4% and 9.7%,
respectively.
Hirsch points out that the actual term, “summer rally,” was
defined by the late Ralph Rotnem “as the lowest close in the
Dow in May or June to the highest close in July, August, or
September. [A ”winter rally” would be the Nov/Dec low to the
first quarter high; ”spring rally” is the Feb/Mar low to Q2 high;
”fall rally” is the Aug/Sep low to Q4 high.]
What upsets me about the talk of a summer rally is that the
investor who is new to the ways of Wall Street may actually feel
like they are missing something special if they”re not
participating. Well, in actuality, the numbers show that the
season is no different from any other and, if you are a long-term
investor, you shouldn”t care anyway!
And this is where the press can do a real disservice. My main
reasons for thinking of the term in the first place were the recent
experiences of 1997 and 1998. If you were to just look at a
calendar and define summer as Memorial Day through Labor
Day (forgetting the formal definitions), certainly ”97 and ”98
were fraught with danger.
So, using the Rotnem definition, here is how the two summer
rallies played out.
1997
The lowest close in the Dow Jones for May/June was on May 1st,
DJ 6976 (also the last time the average closed below 7000). The
high for the 3rd quarter was 8259 set on August 6. No doubt
that”s a nice 18% rally. But on August 29 the Dow had slipped
8% to the 7622 level. This was mostly due to the uncertainty
created by the Asian financial crisis. [Meanwhile, the Nasdaq
was getting creamed.] The Dow Jones was to bottom out on
October 27 at 7161.
1998
The lowest May/June close was June 15, DJ 8627. By the
Rotnem definition, the rally peaked on July 17 at 9337. Hey,
summer is only half over, whassup? As it turns out, 1998 was
the summer of the Russian financial collapse. And by August
31, the Dow had plummeted 19% to 7539.
Monthly Advance/Decline in Dow for the period 1950-1999
And taking a look at individual ”summer months,” I have updated
Yale Hirsch”s numbers. The first figure is the number of months
the Dow advanced, the second is the number of times it declined.
May 26 – 24
June 26 – 24
July 30 – 20
Aug 28 – 22
Sept 19 – 31
*Incidentally, in terms of monthly point gains/losses for the last
50 years, August is the only negative month in the Dow over this
period. Granted, if you take out August of ”97 and ”98, the
month registers a very small gain (and is then second worst next
to October).
For the record:
August 1997.point loss for the month.600.[8222-7622]
August 1998.point loss for the month..1344.[8883-7539]
In conclusion, don”t get swept up in this talk of “summer rallies,”
presented as if it were something really unique. And, in these
volatile times, it is more important to keep an ear to the ground
because recent history has shown that July and August can get
awfully hot for the wrong reasons. Tune into ”Week in Review”
for the latest in this regard.
And guess what? In the fall we”ll take a look at “Santa Claus
rallies.”
Footnote: Except where noted, all research is from my personal
archives.
Brian Trumbore
