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Mark Hulbert
May 27, 2011, 12:00 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” It must be the excessive sun that the brokers on Wall Street get during their Memorial Day trek to the Hamptons.
How else to explain that, like clockwork starting every year right after the holiday, they will start talking about something that is pure fantasy: A "Summer Rally."
To be sure, there is no consensus among the sunburned Wall Street analysts about how precisely to define it. For purposes of analyzing the data for this column, I looked at the stock market's gain from the end of May to its highest close during the subsequent three months"”through Aug. 31.
Every year when Wall Street returns to work after the Memorial Day weekend, there's talk of a Summer Rally. MarketWatch's Mark Hulbert and Laura Mandaro discuss seasonal market trends and the risks of betting on one season or another.
I measured this gain using the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed DJIA +0.07% back to its creation in 1896. What I found might initially impress you: On average over the last 115 years, the Dow gained 5.3% from the end of May through its highest close over the next three months.
A three-month gain of that magnitude compounds out to an annualized equivalent of around 23%.
Before you rush out to put any of your cash back into the stock market, you should know that, when measured this way, every season of the calendar can boast a rally of similar magnitude.
To illustrate this, for each month of the calendar in addition to May, I calculated the Dow's gain from the end of that month to its highest close over the subsequent three months. It turns out that the average of those other months' "rallies" was 5.2%"”statistically indistinguishable from what it was in the case of the so-called Summer Rally.
Oops.
How did investors and advisers come to believe in a Summer Rally in the first place?
I have no idea, but it might have had something to do with the extraordinary rally that occurred in the summer of 1932, in the depths of the Great Depression. The Dow nearly doubled during that year's summer's rally.
Without outlier years like that one, the Summer Rally loses even more statistical support.
Since 1940, for example, the average Dow gain from the end of May to its highest close over the next three months is just 4.0%. Seven of the other 11 months of the calendar sport higher average gains than this.
Of course, the stock market will rally at some point this summer. But its odds of doing so aren't any greater than they are at any other time of the year. After all, every season of the year sees the stock market at times going up"”just as it also witnesses periods of market decline.
Let's hope that Wall Street's analysts this year remember to use sunscreen.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
"Mark Hulbert: An early summer's night dream http://on.mktw.net/k1rI3E" 11:02 p.m. EDT, May 26, 2011 from MktwHulbert
"Mark Hulbert: What the insiders are telling us http://on.mktw.net/jZ98wk" 11:56 p.m. EDT, May 24, 2011 from MktwHulbert
"Mark Hulbert: LinkedIn investors need to do the math http://on.mktw.net/lvwcXd" 11:20 p.m. EDT, May 23, 2011 from MktwHulbert
"Mark Hulbert: How optimistic is the stock market really? http://on.mktw.net/k24G2V" 12:43 a.m. EDT, May 20, 2011 from MktwHulbert
"Mark Hulbert: Leading indicators of stock market top http://on.mktw.net/l0WNtJ" 11:13 p.m. EDT, May 17, 2011 from MktwHulbert
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
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