I have written many times about the tendency for the market to follow various seasonal patterns. Frankly, it is eerie how often the S&P 500 winds up mirroring these historical cycles. To be sure, the market doesn’t always follow the seasonal patterns and therefore, it doesn’t pay to trade heavily on what history suggests may come next in Ms. Market’s game. However, since I’ve observed that the market does tend to follow cyclical patterns a fair amount of the time, I like to, at the very least, pay attention to what the cycles have to say about both the short- and intermediate-term trends.
As you are likely aware, I follow a composite of historical cycles developed by Ned Davis Research. NDR combines the 1-year seasonal, the 4-year Presidential, and the 10-year decennial cycles in order to create their composite projection for each calendar year. The bottom line is that the cycle composite winds up providing a pretty decent roadmap for the calendar year.
However, Ms. Market is currently making a mockery of the seasonal patterns. Instead of the meaningful decline that was to occur from the beginning of August through late October, stocks have instead “melted up” in a slow, grinding fashion. Take a peek at the chart below and you’ll see what I mean.
To say that the market is currently out of sync with the cycle projection is a bit of an understatement, right?
The question, of course, is, why?
On Wall Street it is said that something everyone knows isn’t worth knowing. In my opinion, this stems from the idea that once an idea becomes overly accepted or popular, it tends to (a) already be “priced in” to the market or (b) become a position that the fast money trader types simply “fade” or “go the other way” with.
So, my explanation for the market’s current divergence from the cycle projection is that (a) everybody on the planet knows that stocks tend to correct in the fall and (b) traders may be fading the trade.
