It’s likely the stock market will rally this summer. But don’t expect the gains to hold.


Will a summer rally rescue the stock market from its relentless fall?

Some harassed bulls are shifting their hopes to seasonal strength during the summer months, as nothing else seems to be able to stop the bleeding. The S&P 500 SPX,
+ 0.01%
has fallen 16% since the end of March alone, while the Nasdaq COMP,
-0.30%
has dropped 22%. Both declines are unusually severe over such a short period of time.

My research produces good and bad news about a possible summer rally. The good news is that based on historical averages alone, the stock market is likely to be 7.3% higher than it is today at some point this summer. As for the Dow Jones Industrial Average DJIA,
+ 0.03%,
this represents a gain of almost 2,300 points.

The bad news is that there is nothing special about this potential. Similar, or larger, potentials also exist for other calendar months.

Precisely defining the summer rally poses a special challenge for researchers, as most of those who refer to the rally do not say exactly what it means. It can’t just be that the stock market is rebounding at some point during the summer, as it will certainly sooner or later do so. It will certainly also decrease at some point.

To make sure I got the maximum recovery potential possible for the summer, I measured the stock market gain from the end of May to its highest level during the three-month period of June 1st. as of August 31st. This gain is hypothetical, of course. , because only in retrospect will we know when this highest level has been reached. But it’s hard to imagine that when any other definition is used, the summer concentration could be higher.

I applied my definition to the Dow Jones Industrial Average since its inception in 1896. On average, the summer rally as defined measured 7.3%. This is what will increase the market from the end of May to its highest level during the coming months of June, July and August, assuming that this summer is “average”.

While this concentration would be very welcome, it needs to be put in context. The attached graph informs you of the average recovery potential of all the months in the calendar when measured in the same way. That is, for January, I measured earnings from the end of the month to their highest level in the following February, March, and April. For February, I measured the gain from its end to its highest level in the following March, April, and May. I did the same for the rest of the months as well.

The average potential for recovery each month is 7.3%, which is the same as in May individually. Another four months have greater potential (January, February, June, and December), although the differences between these months and the others are not significant in the 95% confidence level that statisticians typically use to determine whether a pattern is genuine.

From a seasonal perspective, that is, the potential for stock market recovery is the same throughout the calendar.

The bottom line? No doubt the market will pick up sometime this summer. But there is no seasonal justification for expecting a stronger rally this summer than at any other time of the year. This, in turn, means that you should not change your current investment position just because summer is about to begin.

The bullish market will need something stronger than a summer rally to keep it alive.

Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings keeps track of investment bulletins that pay a flat fee to be audited. You can contact him at mark@hulbertratings.com.



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