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Seasonal Trends for the S&P 500 – Best and Worst Six Months, Monthly Breakdowns, Equity Curves (Premium)

Seasonality takes a back seat to price action when it comes to analysis and signals, but seasonal patterns can provide a tailwind to existing trends or fresh signals. This report will look at the best and worst six months, break down the monthly numbers and analyze trends in the equity curves. May is here and June-July are around the corner so we will focus on these three months.   

When it comes to analysis and trading signals, seasonality is behind price action in the pecking order of importance. In general, seasonal patterns are important when they jibe with the underlying trend. For example, bullish seasonal patterns combined with bullish signals can provide a tailwind. We saw this in action with the early November breakouts and April surges after the March breakouts. November and April are, by far, the strongest months of the year. Regardless of the seasonal pattern, price action is still the single most important barometer and I would not let a seasonal pattern override a price-based signal.

I am treating these seasonal patterns like a backtest by showing performance metrics and equity curves. The idea is to be long the S&P 500 only during these periods and then show the win rate, the average gain/loss and the Profit Factor. This is the total Dollar profit divided by the total Dollar loss or the ex-post reward to risk ratio. A Profit Factor above 2 is deemed good because this means total profit was more than twice the total loss. I used Amibroker to backtest each month and generate the equity-curves.

Best and Worst Six Months

The first table shows results for the best and worst six months strategy, which was developed by Yale and Jeffrey Hirsch of the Stock Traders Almanac [1]. The best six months runs from November to April, while the worst six months extends from May to October. This is why we hear “sell in May and go away”.  The results show that the best six months is much better than the worst six months. The best six month period was positive 80% of the time with a Profit Factor above 5. The worst six month period was also positive, but just 65% of the time and with a much lower Profit Factor (1.43).

The image below shows the equity curve for the best six months (green) and buy-hold for the S&P 500 (blue line). The best six month period follows the market pretty well with lower drawdowns. Notice, however, that it was not immune to the bear markets in 2000-2001 and 2008-2009 (red arrows). Nor was it immune to the big swings we saw since early 2018.

The next chart shows the equity curve for the worst six months. Equity starts with $100,000 in 1996 and the portfolio is long the S&P 500 from May to November. There is not position the other months. The shape of the equity curve shows us performance over time. We can see the bear markets (2000-2001 and 2008). The worst six month period lived up to its name from 1996 to 2011, but the equity curved turned up in 2012 and hit a new high in 2020. Thus, the worst six month period performed quite well during this bull run.  

Best and Worst Months

The next table shows performance for each month with the red and green outlines showing months with a clear bias. First, notice that April, November and December have a very strong bullish bias. These months are also part of the best six month period. April and November stand out further with the highest win rates (80%) and the highest Profit Factors (above 3.5).

February, August and September stand out on the downside.  They have the three highest drawdowns, win rates below 60% and Profit Factors below 1. This means the total loss was greater than the total gain.

May, June and July

May and June look like messy months, but July shows a strong bullish bias. May was up 62% of the time and the Profit Factor was 1.21. The win rate in June was also pretty good (64%), but there were some big declines among the losses and the Profit Factor was barely above 1.

We can get a better idea of the monthly trends by looking at the equity curves for each month. The first chart shows the equity curve for May. This is a portfolio that was long the S&P 500 only in the month of May. Even though the equity line is above its starting point (100,000), this line is NOT moving from the lower left to the upper right. It is all over the place and tells us to expect anything in May. At the very least, May does NOT show a clear bullish bias.

The next chart shows the June equity curve and it looks even worse. The S&P 500 surged 6.89% in June 2019 and was also higher in June 2020, but this equity line is not moving from the lower left to the upper right. June was a tough month from 2001 until 2018, and could remain tough.

July has one of the lowest win rates (56%), but a much better looking equity curve. July was a losing month from 1998 to 2008 and a winning month since 2009 (green line). Even though July performance since 2009 coincides with a bull market, the equity line looks much better than the lines for May and June.

Current Market Conditions and Seasonality

Current market conditions are mixed. Small-caps, tech and high-beta are under pressure, but industrials, financials, materials and healthcare are picking up the slack. QQQ, SMH and some other key groups are back below their February highs and lagging. The market seems to be shunning risk in certain areas and this could foreshadow a corrective period.

SPY remains in a strong uptrend, but is also very extended after a big run from November to April (28% in six months). Throw in mixed seasonal patterns for May and June, and the stage is set for a corrective period that could last into June. A correction into June could actually be healthy because it would work off some overbought conditions and set the stage for an upturn in July, which shows a bullish seasonal pattern.  

Thanks for tuning in and have a great day!

Monthly Equity Curves

The next charts shows the equity curves for each month (January to December).