Stock Market Historical Trends Are Overused

The stock market is not easy to get a read on, which is why everyone is always looking for an edge. Looking for that edge is a great idea, but you must always consider how reliable each source of information is before putting it to use. Traders and investors both use historical trends quite frequently, but I believe historical trends are a little less helpful than many believe they are.

One of the most widely used historical statistics is that September has always been the worst month for equities. At the beginning of September in 2010 I was hearing analysts all over television warning of the September sell off, but it never came. On the contrary, the stock market actually performed extremely well in September this year. The Dow returned 7.7% in September alone, which made it the most profitable month of the year thus far. Those investors who blindly sold at the beginning of September were likely quite disappointed that they made the move to sell.

Some traders point to historical troughs in the stock market as evidence for exactly how the trading will go during the next trough. I say this is oversimplifying the stock market. Should you really think it is so easy that you can just draw a correct correlation from the last recession to the next one? There are always going to be different factors at work, which will make the market's reaction unique each time. As the economy evolves, the stock market will do the same.

This is not to say that historical trends and stock market trading patterns should never be examined at all, but I don't think they should be the main reason you make a move in your portfolio. If you are already leaning toward purchasing an individual stock, and we are coming into the period where the market normally sees a "Santa Claus Rally" then purchasing it before that period is likely a good idea. On the other hand, if you simply buy or sell your entire exposure in stocks based on a historical trend, you are likely headed for a disappointing return over the long run.

As an investment professional, I believe that you should always consider the fundamentals of the stock and the economy first. Are stocks out of touch with the fundamental picture that is going on with the economy? If so, then you will likely want to position yourself to take advantage of the opportunity. Keep a broad perspective on investing in the stock market, rather than being too narrow-minded. The historical trends you hear so much about are simply a small piece to the much larger overall puzzle.