A favorable short-term period for stocks approaches

Key points:

• The stock market is entering a short-term positive seasonal window
• The S&P 500 has rallied 75% of the time during these windows
• The next period begins at the close on October 27

A favorable period approaches

A month ago, we looked at the upcoming positive seasonality for stocks. Now, let's get a little more granular, as a short-term positive window is also opening.

The period we will examine is the 5-trading day period that extends from the close of the 3rd to the last trading day of October through the close on the 3rd trading day of November.

In plain English, we are talking about being long the S&P 500 Index during the last two trading days of October plus the first three trading days of November. For 2022, this period will extend from the close on October 27 through the close on November 3.

A compelling history

The chart below displays the cumulative percentage growth for the S&P 500 Index (price only) every year during the five days described above, starting in 1949.

The index showed a gain 55 times versus 18 losses. Its average, median, and maximum gains during the good years far outweighed its losses during the bad ones.

This period has witnessed an S&P 500 Index gain during 3 out of every four years. The median winning period was +1.80% versus a median losing period of minus -0.78% resulting in a median win/median loss ratio of 2.30-to-1. Also, note that this five-day trading period showed a gain of over +4% on eight occasions versus only one losing period above -4%.

What the research tells us…

The S&P 500 Index has witnessed a gain 3 of every four years during the five-day window highlighted above over the last 73 years. Is the market destined to advance during this five-trading day period in 2022? Ah, there's the rub. There are no sure things in the financial markets, and 2022 could easily be one of those off years. 

At the same time, a 75% Win Rate combined with a median win/median loss ratio of 2.3-to-1 over 73 years offers a potential short-term trading edge that some traders may find compelling.