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16 January 2012

Calendar Effects Bullish for Stocks in 2012

Jeffrey Hirsch of the Stock Trader’s Almanac has published his annual overview of calendar effects and what history says will be their possible impact on stocks in 2012.

January typically a good month
January is typically a good month for stocks as cash inflows from year-end bonuses and annual allocations typically propel the market higher. January has been the best month for the Nasdaq and the third best month for the S&P and Dow since 1971.

Santa Claus rally: first positive indicator of 2012
The so called ‘Santa Claus rally’ over the last five trading days of the year and the first two in January, has averaged a 1.6% gain since 1969. This year the SCR saw a 1.9% gain for the S&P. A negative SCR usually precedes a bear market.

January Effect – the first five days
The last 38 up First Five Days were followed by full-year gains 33 times for an 86.8% accuracy ratio and a 13.9% average gain in all 38 years. The five exceptions include flat 1994 and four related to war. January 3rd opened at 12,221 and January 9th closed at 12, 392. The January Effect is positive for the rest of 2012.

January Barometer – wait for 31st January
The January Barometer was created by Yale Hirsch in 1972 and states that a positive January for stocks means a positive year as whole. Since coming into effect in 1934 its record has been impressive with an 88.7% accuracy rate and only seven major errors in the past 62 years.

Solid gains usually follow flat years
Despite market volatility, the S&P 500 finished the year just 0.04 points lower than where it began. Since 1930, including 2011, there have been 11 years where the S&P 500 finished flat (+3/-3%). In eight of the following 10 full years, the S&P 500 went on to post gains averaging 17.9%.

The Myth of the Fibonacci Series

The Fibonacci series produces the Golden Ratio (1.618) by dividing each number in the series by the one preceding it. The resulting figure tends towards the Golden ratio after about eight calculations starting from 0, the first number in the series. Conventional technical analysis theory states that because the Golden Ratio has reoccurring properties in nature, which in turn relate to how the financial markets move, there is therefore something special about the Fibonacci series from which it is derived. However, it can be shown that there is nothing special about the Fibonacci series in being able to calculate the Golden Ratio.

Pick any two numbers at random and produce a ‘Fibonacci type’ series from them by adding them together to produce the next number in the series. For example, 4 and 19. The numbers in this series will be: 4, 19, 23, 42, 65, 107, 172 etc. Divide any number in the series by the number preceding it and the result tends towards the Golden Ratio is the same way is it does for the Fibonacci series. In fact, our research shows that:

1) The Fibonacci sequence is no more accurate in calculating the Golden Ratio than random sequences
2) The Fibonacci sequence does not get to the Golden Ratio any quicker than random sequences

Does this mean that Fibonacci as it is used in the markets has no value? Not at all. A 61.8% so called ‘Fibonacci retracement’ is still derived from the Golden Ratio; it’s just that we didn’t need Fibonacci to tell us.

What Next for the Euro – Read the Economist?

The cover story of The Economist magazine has often served as a useful contrarian indicator of market direction. Whilst no one is going to make an investment decision based solely on a magazine cover, it may help to solidify an existing conviction or highlight that the market is about to peak or bottom. The theory behind the contrarian signal is that because the magazine is aimed at the general public it only reports market sentiment when it is most newsworthy, which is usually when it is at its most excessive and about to change.

In fact, we looked at all Economist covers since January 2000 and found that their covers have a better record at predicting market moves than is generally thought. Moreover, they have got better at prediction in recent years. Their notable achievements include:

The end of cheap money – April 2004
The US housing market crash – June 2005
Bear market in global stock markets – May 2006
Private equity – July 2006
Food prices – December 2007
Oil price – May 2008

Failures include:
World equities (Waking up to Equity Risk) - March 2001
US dollar declines – December 2004 and December 2007

The last issue for November 2011 ran the headline, “Is This Really the End?” over a picture of a burning euro. If any signal can be inferred from this and other euro bearish covers from the magazine, more recent evidence suggests that it is more likely to be right than not and that the Economist’s days as a contrarian barometer may be over.

See all Economist covers since 2000.

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