Market Timing Research

Famed investor Warren Buffett, one of the richest people in the world, announced that his investment firm Berkshire Hathaway will purchase Burlington Northern Santa Fe (symbol BNI), the second largest railway in the United States, for an estimated $34 billion. Burlington Northern owns more than 20,000 miles of track in the United States and Canada, and saw earnings jump more than 25%  last year. Berkshire Hathaway already owns 22% of BNSF.

An analysis of the deal by pundits has some heads scratching. A inflation rate factor seasonal chart of Bulington Northern   shows that the stock price most steadily rises during periods of  slowing inflation rates, rather than rising, but the deal seems to be made partly upon Buffet’s expectation of increased demand from China for American resources, and thus inflationary pressures.

Most of Burlington’s track lines head westward, crossing upper resource rich regions (timber, coal, etc.) like Montana, Seattle and Vancouver. The tracks end in ports shipping most of their goods to and from Asia, especially China and India. This in effect means that Buffet’s “bet on America” is a bet that the United States will be importing more manufactured goods from these regions into the country and selling more and more of its raw materials, unfinished goods and natural resources rather than manufactured goods to the growing Asia region dominated by China.

Economist Erik Reinert, in his book “How Rich Countries Got Rich and Why Poor COuntries Stay Poor” pointed out that countries get rich as they turn away from raw material and commodity production to manufacturing, and countries that lose their manufacturing base become poor over time. Buffet’s deal may not be a bet on America as much as it is a bet on the growing prominence and perhaps predominance of Asia over the US in time.

The S&P 500 Follows different Seasonal trends during Recessions (RED) than during Expansions (Green)

Examining stock market trends in different fundamental economic, monetary and even political environments reveals a multitude of profitable trading opportunities, as well as easily avoided pitfalls.

Today let’s look at the Factor Seasonal Trends for the S&P 500 during recessions compared to expansions.

You can see the S&P 500 trends dramatically different in these two different fundamental environments.

During recessions (shown in RED) the S&P 500 tends to have a brief January rally ending in mid-February.  You can see the expected spring rally is flattened out in recessions.

Active traders should expect to see a lot of indicator whipsaws in the traditional spring rally period during recessions as the market trends sideways instead of up.

The S&P then sees a steep decline in late summer through October before a volatile sideways market grays the hairs of investors during the early winter months.

Contrast that to the S&P 500s seasonal trends during business cycle expansions (shown in GREEN).

In expansions January tends to see little upward movement but the Spring Rally strengthens considerably until Mid-July when the index hits a sharp – but short – downtrend. The autumn months remain seasonally weak but that weaknesses shows as flat, sideways trend in expansions rather than the sharp, gut-wrenching downturns in recessions.

Finally the S&P 500 picks up the final two months of the year showing a strong November and December rally.

You can easily see how profitable analyzing the FACTOR seasonal trends — seasonal trends broken down by the differing economic, monetary and political environments – can be. And the Recessions vs. Expansion Factor Seasonal Trend is just one of several we’ve found has a dramatic impact on market trends.