Don’t bet on a ‘June Swoon.’ Here’s what the data show.


There is no such thing as a “June Swoon” on Wall Street.

Those who are predicting one—and there are many—reveal more about themselves than the stock market. The belief in fictional phenomena such as the June Swoon illustrates once again why investor sentiment plays such a powerful role in the markets, and why contrarian analysis is effective.

What’s not fictional, of course, is that the stock market at some point in June will decline. But that is trivially true; the same could be said of any month. By using the name “June Swoon,” analysts are implying something more than this trivial truth—that there is something unique and special about the stock market’s downside risk during June.

There isn’t. Consider the Dow Industrials’

monthly returns since it was created in the 1890s. June’s average return is not statistically different than that of the other 11 months, when judged according to traditional standards of statistical significance. Three other months—February, May, and September—have worse average returns than June.

To be sure, it’s conceivable that June’s unexceptional average return is hiding the month’s vulnerability to particularly big losses. But that also turns out not to be the case, as you can see from the accompanying chart. Five other months have greater vulnerability than June, as judged by their largest monthly losses.

Another reason not to expect the stock market to do poorly in coming weeks is that market timer sentiment is in the neutral range. That means there is no sentiment-based reason to expect the stock market to have a rough June.

Consider the average recommended stock market exposure level among a subset of several dozen short-term market timers who my firm monitors daily. (This average is the Hulbert Stock Newsletter Sentiment Index, or HSNSI.) I consider any reading in the top 10% of the historical distribution to represent excessive optimism (which is a bad sign from a contrarian perspective) and any reading in the bottom decile to represent excessive pessimism (which would be a good sign). As you can see from the accompanying chart, the HSNSI currently is right in the middle between those extreme deciles.

Sentiment can change quickly, so there’s no guarantee that the current neutral reading will persist for the rest of June. Indeed, given the stock market’s impressive rally last Friday (June 2), in which the DJIA rose more than 700 points, timers could soon decide to jump on the bullish bandwagon.

But for the moment at least, there is no contrarian-based reason to believe anything other than that the stock market in June will be an average month.

What about market timers in other arenas?

The stock market is just one of the arenas in which my firm tracks market timers’ average exposure levels. My firm also constructs comparable indexes that focus on the Nasdaq

stock market, the gold market, and the U.S. bond market. The chart below summarizes where the timers currently stand in all these arenas.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]


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