Tactical Seasonal Switching Strategy Update: Midterm Year “Worst Months” Historically Weakest
By: Christopher Mistal
March 17, 2022
We are not issuing the signal at this time.
From our Seasonal MACD Buy Signal on October 8, 2021 through today’s close, DJIA is down 0.76%, S&P 500 is up 0.46% while NASDAQ is down 6.62%. At this stage of the “Best Months,” this performance is disappointing and far from what was anticipated at the start of the current cycle. However, there is still ample time for the market to move higher before the “Best Months” officially come to an end at the end of April for DJIA and S&P 500 and NASDAQ in June. Our Seasonal MACD Sell trigger could extend the “Best Months” in the event the market does continue to rally, or it could do just the opposite and move us to a more cautious posture should the rally fail.
The long-term track record of our Seasonal Switching Strategy, which is based on the “Best Six Months” in conjunction with our MACD Technical Buy and Sell Signals, has a solid track record of outperformance with potentially less risk compared to a buy and hold approach. Since 1950, DJIA’s average annual gain has been 8.7%. Over the same time period, DJIA has lost an average 0.4% during the “Worst Six Months,” May through October, and gained an average 8.9% during the “Best Six Months,” November through April.
Detractors are quick to point out that there have been positive “bad” months and negative “good” months. This is absolutely true as there is no trading or investment strategy that works 100% of the time (even the best will report a trading loss every once and a while). In midterm election years, the second weakest year of the four-year cycle (page 132, STA22), there is a history of selloffs during the “Worst Months.”. The “Worst Months” in 1974 hosted the largest decline. More recently, during 1998 and 2002, the “Worst Months” were also negative. Each of the last 17 Midterm Year “Worst Months” can be seen in the following table. DJIA and S&P 500 Worst Six Months are May through the end of October. NASDAQ’s “Worst Four Months” are July through end of October.
DJIA, S&P 500 and NASDAQ Worst Months Table
Considering the negative historical average gains in Midterm years, during the “Worst Months” a cautious approach is worth consideration once again during this upcoming early spring/summer. The Covid-19 economic shutdown and ensuing bear market in Q1 of 2020 resulted in a loss for DJIA and S&P 500 during that year’s “Best Months” and an outsized market gain during the “Worst Months” as aggressive fiscal and monetary policy supported a quick recovery. And this year, the Fed has begun a rate increase cycle in the “Best Months” while Russia’s invasion of Ukraine is only further compounding the market’s challenges.
Market strength during recent “Worst Months” periods and weakness during the “Best Months” does not appear to be the result of any permanent change in historical seasonal patterns. It has been triggered by exogenous events and the fiscal, monetary and political responses to those events. Unlike the quick market reversal of March 2020, the Fed, elevated inflation, and Russia’s invasion of Ukraine could easily extend through the entirety of this year’s “Worst Months.”
Applying Our Seasonal Switching Strategy 
Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we take in the Almanac Investor Stock and ETF Portfolios. We do not merely “sell in May and go away.” Instead we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated a record of outperforming during the “Worst Months” period.
For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of these safe havens. Preservation of capital may be more important than growth and with historical averages and frequency of gains reduced; the “Worst Six Months” are a good time to simply step aside if you prefer. August, September and/or October have provided some excellent buying opportunities in recent years and could do the same again this year. 
Potential Worst Months Moves
We are not issuing the signal at this time. We are only preparing you for when it does arrive.
Currently, the Almanac Investor Stock Portfolio and ETF Portfolio are positioned with a long-only bias for the “Best Months” with no long exposure to bonds, no short positions in individual stocks or sectors, or positions in bear market funds. But, beginning April 1, 2022 we will begin looking for our seasonal MACD sell signal. When it triggers, we will transition to a less aggressive stance in the portfolios.
When both the DJIA and S&P 500 MACD Sell indicators trigger a new sell signal on or after April 1, we will issue an Almanac Investor Alert. We will either outright sell specific existing positions or implement tight trailing stop losses. We will also consider establishing new positions in traditionally defensive areas of the market which may include bond ETFs, gold and gold stocks, outright bearish (short) positions and other sector ETFs with a demonstrated track record during the “Worst Six Months.” All stock and ETF holdings will be evaluated at that time. ETFs providing exposure to sector seasonalities ending in April and May along with underperforming stocks in the Almanac Investor Stock Portfolio may be sold at that time as well.
For traders and investors employing the “Best 6 + 4-Year Cycle” as detailed on page 64 of the Stock Trader’s Almanac 2022, this year’s upcoming Seasonal MACD Sell signal should be heeded.