Summer Rallies A Lot Of Broker Hot Air

For those who like to play the stock market rather than invest in it, one of the most legendary concepts is the summer rally.

Stockbrokers, knowing their clients are distracted by vacations and other summertime pursuits, often tout a summer rally to keep their clients interested.

With the market behaving nervously, it won’t be long before talk of a summer rally springs forth again.

Unfortunately, as is often the case with Wall Street marketing ploys, the summer rally does not live up to its billing. First, there is always a rally of some magnitude in every season of the year; second, summer rallies on average are weaker than rallies in the fall, winter and spring.

“Wall Street is full of bromides that aren’t true,” noted Alfred Goldman, technical market analyst for A.G. Edwards & Sons in St. Louis.

Yale Hirsch, in his Stock Trader’s Almanac, defines a seasonal rally as a move in the Dow Jones industrial average daily close from the low point in the two months at the end of a quarter to the high point in the next quarter. Thus, a summer rally would be a move in the Dow from the low point in May or June to the high point in the third quarter (July through September).

Using that definition, Hirsch studied seasonal rallies for the last 31 years and found there never was a season when there wasn’t a rally, however brief or small.

The smallest rally, in terms of percentage gain in the Dow, occurred in the summer of 1981, when the Dow rose just 0.4 percent from seasonal trough to peak.

The greatest rally happened in the fall of 1981, with the Dow jumping 37.8 percent from seasonal trough to peak.

Hirsch also found that, on average, summer rallies increased the Dow Jones industrial average by just 9.3 percent - the lowest result of the four seasons. The best season for a rally was winter, with the Dow on average climbing 13.5 percent trough to peak.

Rallies also have varying durations. The current rally began in late November and has shown remarkable resilience. On the other hand, the summer rally of 1994 lasted about 2 months, from late June to mid-September.

It’s worth mentioning that the greatest summer rally since 1964 occurred in 1987, a 22.9 percent gain just before the historic market crash in October of that year.

So, when your stockbroker tells you to buy now because a summer rally lies ahead, remember there’s virtually no chance he or she can be wrong - there will be some sort of summer rally. Beware, however, that engaging in market timing is often better for your broker than it is for you.

There are two major indicators that the market’s mood may be souring: Trading volume picks up and losing issues far exceed winners on days when the Dow industrials fall at least 50 points. on the Dow industrials).