Within the next month and a half mass media will be offering an investment idea – New Year rally…
Some people think that it’s time to purchase all shares indiscriminately. Others believe it’s a dirty trick as “market sharks” will use the rally to make money. Nevertheless, the rally does take place!
While risking your assets do not rely on groundless statements. One should always keep in mind that investment is a kind of business, where he/she has to compete with “sharks” in order to gain profit.
Let’s find out what is the most effective way to take advantage of this market regularity.
The analysis is based on MMVB Index (2000-2010) without taking into account the crisis period with abnormal volatility.
The above mentioned diagram indicates that the 1st quarter was the most profitable one (+16.8%). Then followed quarters 3 and 4 (some 8%). The 2nd quarter turned out to be the least profitable (+3.7%). The 1st quarter is usually the most profitable one.
Diagram 2. Average monthly gain of the index
Considering the monthly dynamics we can see that the most profitable period is December-April, when the average gain equals 4.5% (about 22.5% in 5 months). The monthly standard deviation of the period is about 8%.
By smoothening (reducing) the impact of the long-term trend we get the following seasonal picture:
Diagram 3. Index seasonality (with smoothed trend)
December-April shows an impulse followed by a correction until August. Before the December impulse there is consolidation.
How to take advantage of it?
Numerous experts advise to buy the New Year rally and follow the “sell in May and go away” logics.
For more active traders we can offer the following trading tactics:
Let’s assume that the market is currently getting close to the resistance. Keeping in mind that the seasonal trend is about to start soon, it would be wiser to bet on a breakout than on a rebound from the level.
If in November-December the market retraces to the support levels it would be wiser to assume that the support will stand its ground and the uptrend will continue.
Knowing that the standard deviation is 8-12%, one may look for an opportunity to buy at the uptrend during “the bullish period of the market” after a 10-20% retracement (when many others begin to panic). At such moments one may also make use of the trend style of trading.
Here is another example: Late April. Since January the market has already made a 30-40% movement and is now showing signs of overheating while nearing another resistance level. In such a situation it would be wiser to take-profit as the market will probably start retracing. By the way, it was in May that the downtrend of 2008 broke out.
The given statistics should also be taken into account while investing in the UITs (unit investment trusts), the portfolios of which include mainly stock, experts form Portfolio Investment Department say.
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