Annual Seasonal Pattern’s Late Summer Dip

We are now in the rough part of the year for the stock market, when annual seasonality favors the bears.  Everyone by now has heard the phrase created by the late Yale Hirsch, "Sell in May and go away."  It is a great rhyming phrase, but over the years since Hirsch came up with it, the actual seasonal top has shifted a little bit into July.  And there is just not as catchy a rhyming phrase that starts out "Sell in July...."

Earlier in 2024, the DJIA was not following its Annual Seasonal Pattern (ASP) very closely.  But the correlation to that ASP tightened up more beginning in May 2024, and has been working nicely since then.  Even the Aug. 5 bottom, which was brought about by a rate hike from the Bank of Japan, seems to have arrived right on schedule.  The price rebound since that bottom has been very robust, more so than the ASP suggested, but that is understandable given how oversold that bottom was.  The magnitudes of the price movements may not necessarily match what this average pattern shows, but its purpose is not to describe the magnitudes.  Rather, its best use lies in modeling the timing of what the stock market does and when.

You will note in the chart legend that I have left out 2020 in the calculation of this ASP.  I did that because the Covid Crash bottom in April 2020 and the ensuing QE-fueled rebound were so huge that their contributions to the average would drown out the other years' contributions, thereby skewing the appearance of the ASP.  The point of calculating an Annual Seasonal Pattern is to make an average depiction of what "normal" looks like.  The events surrounding the Covid Crash were far from normal, so I believe it is fair to exclude the entirety of that one year. 

I also start this ASP's calculations beginning with 1997.  I could have included all years going back to the creation of the DJIA in 1896, but doing that is not necessarily helpful.  The behavior of the market during the course of each calendar year has changed somewhat over time, as I addressed in a 2018 Chart In Focus article. 

If the DJIA traces out the steps of the ASP perfectly, then we should see a decline from here to a preliminary bottom due in late September, followed by a retest bottom in early October.  But the stock market does not always follow such average patterns exactly.  The situation is further complicated by this being a presidential election year, so the normal seasonal up move that happens in late October may not happen this time.  In election years, investors often continue holding their collective breath until the votes are tallied in November.