Monitor
IT IS TIME to haul up that buy signal again ahead of the annual Lunar New Year rally on our stock market.
It is not a guaranteed rally of course. Some years it does not materialise. It is also not purely a Lunar New Year rally. It tends to start in early December and take in the Christmas season.
But it is still a definite phenomenon. On average over the past 25 years, the Hang Seng Index has risen by just over 20 per cent a year and two-thirds of that gain was made from early December to early February.
The first chart shows the trend of this average year. It starts on February 6 just as the rally peters out and assumes a starting base of 100 for the index on that date for each of those 25 years.
For the first two months after the rally the index tends to swing up and down a little but makes no real headway. This is followed by a period of steady gain that lasts until August and then the doldrums set in once more, with the index on balance losing ground in August and September. Share prices then firm a little as the countdown starts and somewhere between the beginning and middle of December the rocket blasts off again.
Why? I don't know. The traditional reasoning has it that this period represents bonus time and people are also in a happier mood as the new year approaches. It is undoubtedly part of the reason but whether it explains the rally entirely is another question. Let psychologists debate it.
However, having done all the major work of setting up the spreadsheet last year, I had a bit more time on my hands to see whether it applies to other markets too. The second chart shows the average years for the Straits Times 55 Index in Singapore since 1986 and the S&P 500 Index in the United States since 1976.
There is clearly a Lunar New Year rally in Singapore also and it starts at roughly the same time, although it does not lift prices as much as in Hong Kong. Notice that Singapore's average annual gain is less than half of Hong Kong's.
Singapore also shows the slack two months after Lunar New Year, the steady gain up to August and the retreat of share prices thereafter, although in Singapore's case it is a more pronounced retreat and lasts longer.
But share prices in the US also tend to perform most strongly during a period from November to early February. Lunar New Year clearly cannot be the explanation here. We shall need another theory.
Note that the late summer doldrums is a fact of life in the US as well. US share prices generally tend to rise from April to August and then go flat or down until late October.
Remember, however, that these charts represent average years. They may give an ancillary clue to timing entries and exits from the stock market but Sod's Law is sure to operate if you rely on them to the exclusion of other timing signals. The year you do it will be the year that things go the other way. Doesn't investment always work like that?
Graphic: jake12gbz
