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Lucky number seven may turn out to be a curse for the stock market.
Trading in stocks is a numbers game. Buy low, sell high. Are valuations too extreme? How many more years can this bull market run? But the one number that investors may have to start paying attention to is 7, a numeral that according to one investment adviser has some relevance to the market in a wholly unexpected way.
Seven is normally a number associated with good fortune but when it comes to equities, it appears to be more of a curse.
Dana Lyons, a partner J. Lyons Fund Management Inc., recently noted that the performance of the stock market in the second half of years ending in 7s has been among the most dismal.
Lyons summarized the track record of the latter half of “7” years as follows:
With the exception of 1927, it has literally been all downhill.
In fact, “7” years have the worst July-December returns, reporting a median return of negative 9.29%.
“Other than the 1st half of year ‘0,’ the median return of the 2nd half of year ‘7’s’ is over 600 basis points worse than any other half year,” writes Lyons in a blog post.
The second half of “7” years also recorded the biggest drawdown for any six-month period, posting an average of 20.7%.
Lyons admits seasonality is a tricky thing and should only be relied on for minor “tweaks” in portfolios and positions. And no competent strategist would ever be caught giving credence to the belief that past performance is indicative of future results.
Yet, Lyons believes investors should stay vigilant given that some of the most profitable and reliable timing systems closely correlates with seasonality.
“Some of the historical seasonality trends are so compelling that, at a minimum, they command our acknowledgment,” he said.
Investors will be hard pressed to look for monsters under the bed when stocks have been on a steady upward trajectory all year. But as this market has witnessed countless times, it doesn’t take much to turn a rally into a stampede for the exit.