Among the many statistical studies of seasonality available, the seasonality study of the longest-running index in the world, and also one of the most followed and used for its ability to dictate the timing of the movements of all the world stock exchanges: the Dow Jones Industrial which represents the 30 most capitalized industrial stocks in the USA.
This statistic suggests that years ending in "7" are structurally unfavorable to equity investment and indeed often initiate market crises. Today we propose to investigate this matter in detail to ascertain whether it is justified to adopt precautions in the current year.
The Dow Jones lends itself very well to this type of analysis because historical series have been available since 1896. Let's start by examining the aggregate performance of the index on a ten-year scale. The sample consists of 12 decades (source: Seasonax).
From the graph we obtain some general data: the average appreciation of the Dow Jones index over 10 years is 65% (i.e. 5,13% per year which is the long-term average of appreciation of the Dow Jones), furthermore we see that on average the first two years of each decade are not very positive, while the years ending in "5" are on average particularly positive.
Now we come to the years ending in "7". The pattern suggested by the seasonal graph (within the red oval) is that these years are characterized by a very positive first part and by a steep descent in the second part of the year.
So much for the medium pattern. We now propose to verify the persistence of this pattern over the various decades. We do this by gradually examining the graphs of the individual years ending with "7" (source: Bloomberg).
Each graph covers a period of two years: the year in question and the previous and following six months in order to give an overall idea. We thus have 12 graphs to examine.
Let's start with charts that are practically coincident with the average pattern. These are 1897, 1917, 1937, 1947, 1957, 1967, 1987, 1997 and 2007. In all these years there is a positive or neutral first part of the year, and a negative or strongly negative second part. Below are the graphs relating to these 9 years:
Then there are two years, 1907 and 1977 in which the first part of the year is not positive, the negative movement begins in the first months of the year and the overall trend is strongly negative. Below are the graphs:
The only year that does not follow the prevailing pattern at all is 1927. The crisis came a few quarters later in 1929.
PROJECTED IMPACT
The analysis of the graphs confirms that the years ending in "7" are negative years for the American stock market (in particular, but not only, in the second half of the year) in 11 cases out of 12 examined
From an operational point of view, it is an element that must be taken into consideration and which suggests prudence in setting up equity operations during the year, especially if confirmed by other technical, political and fundamental signals. The positive trend of the first part of 2017 combined with the fact that new absolute highs have been reached, as happened for example in 2007, 1987, 1967, increases the probability that the pattern will repeat itself again this year. It should also be added that these patterns are observed by many traders and traders, and this is also a factor that could trigger preventive selling at some point.
