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Friday May Day Blues

Created:
29 May 2008
Written by:
Simon Thompson

The market could rise tomorrow, but if you are a betting man you wouldn't bank on it. In fact, the stats say that the odds are heavily stacked against the FTSE 100, FTSE 250 and FTSE All-Share ending Friday 30 May in positive territory.

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As I highlighted three weeks ago (Probability Theory, 9 May 2008), the odds of the market rising in May are pretty slim, either if the rise in April has been too extreme or if the aggregate falls between 1 January and 30 April have been too deep. Both were the case this year, implying that the FTSE 100 index could struggle to end the month above where it started. For the record, the index ended April at 6087, which as it happens was also the closing price on Friday 23 May.

Now that closing price last Friday may not mean much to most people, but it has great significance to me for three reasons. First, the last week of May is statistically the fourth weakest of the year, with the FTSE 100 falling 62 per cent of the time since 1984 (average loss of 0.2 per cent and standard deviation of 1.7). Therefore the odds are weighted towards the closing price on the FTSE 100 ending the week below 6087.

Secondly, 30 May is by far the weakest trading day of the whole year, with the UK stockmarket falling 80 per cent of the time in this week since 1984 and posting an average loss on the day of 0.4 per cent (standard deviation of 1.3). That is reason enough to be wary of being long of the market tomorrow.

But it gets better, because there is a price trend that dates back seven decades. Namely, if the UK market falls in the second quarter of the month (9 May to 15 May) and third quarter (16 May to 23 May), as it has done this year, then the odds are that it will also decline in the final quarter of the month (defined as the period 24 May to 31 May) if a bear market is running. Since 1938, there have been 18 bear markets running in the UK at the end of May, and prices fell in 16 of those 18 final weeks of May after falling in the second and third quarters of the month.

So given that we are in a bear market, the history books clearly point to a close on the FTSE 100 of below 6087 at the end of play on Friday 30 May. And the good news is that the index is currently trading around this level, so if you are not already shorting the market - either through a spread bet or the covered put warrants I outlined in Probability Theory - then it could well pay dividends to enter a short trade now, given the weight of historical trends that points to the market falling on Friday 30 May.

Alternatively, fixed odds online betting firm www.extrabet.com are quoting odds of 1.65 that the FTSE 100 will be below 6087 at close of play on Friday. (The market is the FTSE 100 weekly up/down market). So a down bet of £100 would return a profit of £65 if the stats are correct and the market does indeed fall over the course of the week.

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