FSU Editorial: "The Summer Rally: Ahead or Behind Us?" by Anthony M. Cherniawski 07/15/2005

THE SUMMER RALLY
Ahead or Behind Us?
by Anthony M. Cherniawski
July 15, 2005

A common phenomenon after a market sell-off in mid-year is the perennial summer rally. The late Ralph Rotnem categorized summer rallies as those starting with a Dow Jones Industrial index closing low in May or June and ending at the highest close in July, August or September. The buzz on the Street is that the summer rally is just begun and will extend into the end of the year. This couldn’t be further from the truth.

The fact is, the Dow has already advanced 4.76% form its closing low in May of 10, 140 to its closing high in June at 10, 623. How does that compare to the average summer rally? According to Stock Trader’s Almanac, 2005 edition, the perennial summer rally is the least of all seasonal rallies, averaging 9.4% over the last 40 years. By that standard, the summer rally may already be half over. Two thirds of all the summer rallies were single digit in size, so any expectation of a rally just beginning may be wishful thinking.

A second consideration is the timing of the summer rally. In fact, this year’s rally may even be called the spring rally, since the bottom of the current advance occurred on April 18^th at 10,012. Considering that there was only a very brief summer rally in 2004 and an early seasonal bottom in August rather than the usual October bottom, it appears that the Dow Industrials’ clock may be a bit early this year, as well. Could it be that the summer rally is nearing completion or already complete? If measured from the April low, the rally has already advanced 6.28% to today’s high, about two-thirds the average summer rally size. See the chart below.

A final consideration is that this rally is already becoming long in the tooth. The current rally is now three months old. So can we expect bigger and better things out of this rally before the summer is over? The answer is that the market will do what it wants to do, but statistically, there isn’t much more to hope for at this point.

While every season has its rallies, there is almost always a correction as well. Unfortunately, the next two quarterly corrections are considered the worst, from a seasonal perspective. According to the Stock Traders Almanac, 2005 edition the average seasonal decline from the May/June highs to the third quarter lows is 9.0%, while the average seasonal decline from the August/September highs to the fourth quarter low is 9.3%. Given the paucity of severe declines for the last two years, it would seem that at the very least, a reversion to the mean is in order.

The Practical Investor, LLC is a State Registered Investment Advisor

CONTACT INFORMATION
Anthony M. Cherniawski
President and CIO
The Practical Investor, LLC,
State Registered Investment Advisor
East Lansing, MI USA
Email

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.