The Market's Best Months

Abstract

This research demonstrates that the greatest monthly gains in the S&P 500 directly follow corrections. It appears as if the corrections themselves re the source of the exceptional performance. The author also categorizes corrections using objective criteria because the length of the rebound following a correction can be estimated by knowing the type correction. The impact of these two insights on market performance is captured in a hypothetical timing model. The model outperforms the S&P by 3.9 percentage points a year for fifty years but requires being invested only 40% of the time. The model is not intended to be a money making scheme, but instead a device to demonstrate the power of these ideas as they would play out in a quasi–real life scenario.