Fun With Numbers

A very interesting day in the markets.  Lots of movement, lots of news, lots of things to mull over.  And while I'm still in the midst of sorting through all that happened today, I thought that I might show you some data I've put together on the equity markets that were pretty interesting (or at least I think it's interesting).  The graphic below looks at the returns of the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite Index from a monthly return perspective.  With many market prognosticators (myself included) routinely referring to September as the most dire month for stocks, I thought that it would be worth while to 1) confirm this claim  and 2) see if there was any insight that could be gleaned from the monthly statistics.  I think I was successful on both counts.  Have a look (click for a larger image).....

While there are numerous things I could point out from this data set, here are the items I found most interesting.  First, the 8.90% gain in the S&P 500 this month (as of Monday's close) is the largest rally ever seen in this month since the index's introduction.  With all the economic uncertainty swirling around at present, it doesn't seem like the kind of environment that is conducive to a record-setting monthly performance.  Of course, anything is possible, but I think any rational person would have to agree that this is an odd development to be sure. 

Second, looking at the confidence interval data (For those unfamiliar with this statistical measure, these values represent the range of returns that are likely to be seen during a particular month.  So, looking at the month of January, 95% of the time we would expect that the returns would fall somewhere between 0.00% and 2.08%.), it is interesting to see that the both the DJIA and S&P 500 have four months where the lower bound of the confidence interval is greater than or equal to zero.  This implies that investors are likely to see, though not guaranteed, positive returns in these months.  From a trading standpoint, this is very helpful as it provides some guidance on when shares should be purchased. 

Third, while the data did prove that the month of September is, in fact, the month with the lowest average return across all indices, the months of August and October tend to see bigger selloffs on average.  This suggests a couple of things.  1)  Negative September returns tend to be more frequent in occurrence than any other month.  In fact, among all months, September saw 33 of its 82 (40.24%) September returns on the S&P 500 turn negative.  The month with the next most frequent negative returns turned out to be June (30 months).  2)  While September experiences more negative returns that any other month, the scale of the losses are relatively modest.  Looking at the average losses by month, September ranks a surprising 9th on the list, which, for me, was a bit surprising.  This suggests that much of the caution that surrounds September, may be a bit over blown.  To be sure, September remains a mine field, but it seems there may just be fewer of them laying around.

As I said earlier, I could talk about these statistics at considerable length.  While a simplistic analysis, I think this type of research goes a long way to helping us all understand why markets behave the way they do and, in the end, make better trading decisions.  I hope you find this data as interesting as I have.  Should you find something particularly interesting in the data, or desire some additional analysis, please shoot me an email and I'll be sure to get back to you promptly.

Until tomorrow.....