Picking the Best Months to Be in the Market

By Matt Blackman – Market Analyst for www.TradingEducation.com  

We have already examined the best years to be in the market. As we saw, the pre-election year (year before each Presidential Election) beat the other three years in the election cycle by a wide margin. Now, let’s take a look at the best months to be in the market comparing pre-election years with all years between 1902 and 2006.

How does an upcoming election affect monthly Dow Jones Industrial Average performance?

Average versus Pre-Election Months

In a back-test of all months, buying the Dow on the first trading day of the month and selling on or around the last day, we see that November was the best month, followed by April, December and October. September was by far the worst month to be in the Dow losing nearly 4 times as many points as the runner up loser – August. By only being invested during the best four months of the year of November, April, December and October the investor would have captured 145% of the Dow’s annual gains.  

Figure 1 – Chart showing the performance of all months in total Dow points between 1902 and 2006. As we see, the worst month of the year, September, lost more than the best month of the year, November, gained. Two thirds of the months were gainers and one-third we losers over the 104-year period.

There were a total of 25 pre-election years between 1902 and 2006. Since this has historically been the best year to be in the market, annual returns were higher. As a result more months were winners with only September losing money. But we also see that individual performance for the winning months was reduced. Returns for the best four pre-election months totaled 84.5% compared to 145% in all years. So while the year before each election was better, there were fewer exceptional individual months.

It is also interesting to note that the best performing month in all years, November, was relegated to number seven in pre-election years while April was the top month. December moved from position three into second place during pre-election years. Loses were also more muted with September losing about one-third as much as it did in all years.  

Figure 2 – Compared to figure 1, this chart shows monthly Dow performance in points for the 25 pre-election years between 1902 and 2006, only one month, September was a loser and eleven months showed gains. Also the best month of April gained much more than September lost.

How do you make money with this information? How many realize that they can outperform the market in an average year by only being invested for four months of the year?

October, November and December captured 107% of total Dow performance over the 104-year period. The best three-month pre-election period, however was February, March and April, which accounted for 50% of the annual average gain. So while individual monthly gains were higher in all years, it was easier to make money in pre-election years since annual performance was higher and only one month lost money.

Next we will look at the best quarter to be in the market. Stay tuned!

Matt Blackman is a market analyst for www.TradingEducation.com, a free educational website, and is a technical trader, author, reviewer and keynote speaker whose work has appeared in a number of major financial publications, websites and newsletters. He is also the host of www.Electionomics.com a website devoted to investigating the impact of elections on stock markets around the world.  He is a member of the Market Technicians Association (MTA) and Technical Securities Analysts Association (TSAA).