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An average year in the life of the S&P500

Seasonality is an important and sometimes overlooked part of economic and market analysis. While it's absolutely critical for asset classes like commodities, it's also useful for more traditional assets like equities. From old sayings like "sell in May" to the "Santa Clause rally" seasonality exists to a greater or lesser extent in the stock market too.

The chart below gives you a 2-for-1 look at the average seasonal pattern for the S&P500 and the CBOE VIX (implied volatility). The S&P500 is indexed to 100 at the start of the year and is grown by the average daily change by business day from the period 1990-2015. The VIX is the average level by business day over the same period.

There appears to be a clear pattern of seasonal underperformance for equities around this time of the year, and the tendency is for the VIX to trend upwards to peak around end-September/early-October. While the end of year rally and grind down in the VIX looks tempting the seasonal trend is not your friend at this time of the year, and the next two charts really nail this point home.

The above graph compares the S&P500 YTD in 2016 to the historical average pattern for the period 1990-2015. I have put the series on different axes as the historical average, by virtue of being an average, moves in a narrower range than the market does in any given year, so using 2 axes gives a better feel for the pattern of movement of each series. Clearly the S&P500 has been tracking very closely to its historical seasonal pattern - if this continues we will get a sell-off towards the end of September/early October. It's a similar story for the VIX...

The above graph shows the average level of the CBOE option implied volatility index for the S&P500 (VIX) across the period 1990-2015 and is also compared to the trading of the VIX in 2016 YTD. Aside from the dramatic spikes earlier this year and again around Brexit, the VIX has followed the seasonal tendency to trend down in the first half of the year. Traders of the VIX will want to pay attention then to the historically tendency for the VIX to trend up at this time of the year, climaxing around October.

So while there's much more to investment strategy than just looking at seasonal patterns alone, these charts provide a stark and pressing reminder that seasonality can and does exist in the stockmarket; and the seasonal trend is not your friend at this time of the year.

Bottom line: The historical pattern is for the VIX to trend up and the S&P 500 to fall going into September/ October period, this warrants a cautious tactical bias.

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