'Remember buy November' is an adage heard on trading floors the world over. Yes, it might sound like a child's nursery rhyme. And it's probably the last thing you'd expect to hear coming from the mouths of seasoned traders. But for some traders, this seasonal stock trend is something worth remembering.
Why November sees stocks rally?
‘Remember buy November’ is the opposite of another popular trading adage: 'Sell in May and go away'. The thinking behind both purported seasonal trends is that traders should divest their stock holdings in May, and start picking up November stocks six months later.
Traders who follow this strategy or seasonal trend believe that during the summer, stock markets tend to underperform. The theory goes something like this: A lack of market participants and low volumes make trading slower. Yet, the autumn-winter months see higher volumes, more market participants and bigger gains as traders return to the markets.
On the charts, there is some evidence of this seasonal stock trend. Between 1950 and 2013, the Dow Jones delivered an average 0.3% return between May and October, according to a Forbes article. In contrast, the period between November and April delivered a 7.5% average gain over the same time frame.
“A lack of market participants and low volumes make trading slower. Yet, the autumn-winter months see higher volumes, more market participants and bigger gains as traders return to the markets”
And According to All Star Charts, if you had invested $10,000 in the Dow using this strategy, you would have made over $1 million during this period. If you'd done the opposite and bought in May, and sold at the end of October, you'd have made $1000.
Yet it's worth pointing out that this isn't always the case. An investor who sold Nasdaq stocks in May 2016 would have missed some stellar gains, according to Investor's Business Daily. Reason? The NASDAQ climbed 55% between June 2016 and January 2017.
Do US election years help November stocks?
US election years are when you see this seasonal trend at its most pronounced. It seems that a possible change in the White House gets traders watching out for bargains.
In the October before Donald Trump's election on 6 November 2016, the Dow Jones Industrial Average dropped just under 1%. The stock market then rallied 5.5% the following November. A similar pattern emerges when you look at the first-term elections of both Barack Obama and George W Bush. Each election sees the markets wobble as uncertainty builds over economic direction, before a post-election night spike.
“Each election sees the markets wobble as uncertainty builds over economic direction, before a post-election night spike”
October stock markets are infamous for a drop in value. In fact, six of the 10 worst single-day drops have taken place in October since 1928. November then sees a rally that continues over the next six months.
Is this a self-fulfilling prophecy? Well, during November 2007 to April 2008, the stock market actually fell. Likewise, between April to October 2016 US stock markets gained. So clearly, it’s an adage that’s worth taking with a pinch of salt. It seems nothing will replace understanding the markets and having an appropriate trading strategy in place, including risk management.
Right now US markets are in the longest bull run in history. Some stocks, particularly in the tech sector, are hitting all-time highs. So the question is, is there any more room for stocks to climb?
Events that could lead to gains include the US and China sitting down to try and resolve the ongoing trade war. The bull run in the S&P 500 and Russell 2000 could also be maintained if the Fed continues to cut interest rates to power the US economy. But it’s up to traders to decide if November is really the time to buy.
Disclaimer Past performance is not a reliable indicator of future results.
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