Tuesday, May 10, 2011

Alternate Seasonality At Citi

This should be an interesting approach. The small and mid cap strategists at Citi went so far to write yesterday:

This “Topics” note provides a historical look at summer seasonal trading patterns, but with an alternate set of data where we remove recessionary periods, including the “tech bubble” time period, as well as the outlier circumstance that contained the ’87 “crash”. We acknowledge that this approach entails a large element of subjectivity but, nevertheless, provides an interesting, and alternative, set of observations. Figure 1 shows the seasonal trading pattern for the Russell 2000 with all periods since index inception in 1979 included. Figure 2 provides the “alternate” look.

Click on charts to enlarge, courtesy of Citigroup Global Markets.

And it continues just like this:

The takeaway of this analysis is two fold. First, there is clear evidence of small cap seasonality during the summer months, when viewed back to Russell 2000 inception circa 1979. Second, when the ’81-’82, ’90-91 and ’08-’09 recessionary periods, along with the ’98-’02 “tech bubble” phase are removed from the seasonal analysis, a much more benign summer seasonal trading picture emerges.

We acknowledge the inherent difficulties in defining “mid cycle” from a traditional statistical perspective. While removing “recessionary” periods, as well as the tech bubble phase, increases risk of data manipulation, we argue that this is, nevertheless, as relevant as traditional historical analysis, where average calculations can be overly influenced by outlier periods.

So, we acknowledge, but we will do much more to talk up? Hey, but this is normal market practice, just assume, e.g., money market indices in Europe ...

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