BUYING the market in the January selloff - sees big returns…

A quick reminder of how the ASX 200 - or big caps go ... WHEN BUYING DURING THE JAN SELLOFF, THEN LOOKING AT THE "PERIOD AFTER" (the bad period - does "sell in May" really work ?)

This year the ASX 200 at its low in Jan IS WHERE IT IS RIGHT NOW down -3.3%

I push the market as a strong BUY most years - from mid December for a run into early January (but last year I pushed it hard as a BUY in October & then again in Mid Dec) - but now we are in January - you do one of 2 things

• (1) If you are a "trader" you take profits in a few stocks - but you really need to get your timing 'perfect'. This time with the market's huge rally, you can safely lock in some big profits. Also with an increasing number of Australian strategists all calling the market a BIG SELL right now - you can at least know you are following what the experts are all saying.

or

• (2) You hold most of your positions & don't sell in mid January - yes mkt drops but most year's the drop reverses very quickly & you have to buy back before it rallies back - so as an alternative instead - you hold your positions (so just stay long & ignore all "the noise") for the next 3.5 months until the end of April. This is always my preferred strategy - stay near fully invested.
• It may feel bad right now - holding on - with every expert telling us to SELL - and with sell off just hitting - BUT when you look back at the end of April I can guarantee you'll have a completely different view .
• Look at the numbers below - they are hard quant numbers that have "no emotion" - because I've seen this so many times over the last 30 years I did a deep dive into this period & the numbers came out exactly as I thought & as I've seen markets play out so many times over such a long period.
• Of course it doesn't happen every year - but it happens far too many times to be just a "coincidence"

but have some cash aside for either ....

• (1) a Jan sell off (which is happening now) or ..
• (2) buying stocks pre reporting that you think may have a good result or
• (3) buying a stock on the day it reports, if it has a good result & closes "up on the day"- my data - after looking at 16 reporting seasons since 2016, indicates that this is a good buying point for the next 4 months
• So being net long the market going forward for the next 3 months - to the end of April - has been a winning strategy so many times.

What are the returns over this period ???

• Over the last 231 years one of the best buying opportunities has been to buy during the selloff that the market has most January’s & holding for 3.5 months until the end of April.
• This strategy has had a phenomenal winning success rate of 84%.
• I.e. in the last 31 years its been up 26 times
• The average rise over those 3.5 months has been a massive +5.89% (before 2020's shocking -17.2% drop - thanks to COVID - it had been running at an average rise of +6.57%)..
• and considering the average gain in "the ASX 200 each year (over 12 months)" since 1993 has been +6.35% - this is very significant..
• While the 26 times it was UP the return was a massive +8%

Ok now having a look at May to September – is it really bad??

Remember the old "Sell in May & go away" ... well .. let's see if it's just crap or does it work

Looking at the ASX 200

• It has closed down 16 years out of the last 31 years or 51% of the time (vs Jan to April down just 16% of the time)
• Thus it has only closed up just 49% of the time (May to Sept) vs 84% for Jan to April

The average move in the 5 months from May until September has been up just +0.14% (vs +5.89% Jan low to end of April)!!

Quite amazingly the average gain in the

• 15 years it was up was +8%

While the average loss in the

• 16 years it was down, the fall was -7.26%

BUT SMALL CAPS DO BETTER than ASX 200 stocks in the weak 5 month period

May to September– ??

Looking at the Small Caps

• They closed down just 12 years out of the last 33 years or just 36% of the time (vs ASX 200 that had a 51% drop rate)
• Small Caps are up +1.26% in this "bad period vs ASX 200 that are up just +0.14% !!!

So small caps tend to outperform the big caps in this period

Chart of Small Caps over the "bad period" (or the "Sell in May & go away" period).

Looking at Small Caps - how do they do in the "strong period" from Jan lows to end of April - it's not the same in the good months either!

• Has seen 7 losing occasions
• While has been up 21 times
• Average though in the 28 years since 1996 has been +4.64% - so still good– but not as good as ASX 200 which is up +5.89%
• BUT it may underperform the ASX 200 in Jan to April BUT from May to Sept the Small Ords has outperformed the ASX 200 - with Small Ords in that period up +1.26% vs ASX 200 up just +0.14%, as mkt takes on more risk & looks for growth after the initial early run for the year.

Small Ords also does well from now (Jan lows) through to the end of April.

Two huge factors support the mkt over March & then April

1. The 3 big banks (20% of ASX 200) go ex dividend in May & many retail investors will chase those dividends. So what we see is that the banks run in April ahead of their results in May (and hence mkt rally is usually supported by this run).
2. Dividends being paid in March & April are the "biggest paid" over a 2 mth period ever – in 2022 for instance we saw an extraordinary cash burst of of $36.2b and then again this March/April 2023 of $36.2b.
3. So I've I have shown previously, it the months where more than +$7.6b in dividends are paid - the ASX tends to do a lot better than months where there are less dividends paid.
4. This is because a lot of these dividends get "re-invested" into the market & hence supports it during the March / April rally period that we so so often.

This shows the value of dividends that have been paid in March & then April, the last 9 years since 2015

• were around $20b to $22b from 2015 to 2018
• then up to around $25b to $27b from 2019 to 2021
• but the last 2 years have stepped up to $36b

Looking at March & April & the total of the 2 mths

The dividend gives March and April a super charge.

• Note also that April +1.98% has been the BEST month for the ASX 200 over the last 24 years
• March used to be as well - but the -21% drop in March 2020 has distorted this - in most years it's a lot better than these averages indicate.

Get more insights from the insto desk in the Coppo report

This article is an excerpt from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more here.

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