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Posts Tagged ‘Stock Market Almanac’

It was a tough May for stock market investors.  It was the worst May for the Dow Jones since 1940 with a loss of -7.92%.   If you listen to Wall Street, this is just a correction.  I would suggest otherwise.  You have to consider whether or not things have changed for this market and we are reverting back to the bear market.

I have felt all along that this is was nothing more than a bear market rally that started in March 2009 that might have ended in April of this year.  All we can do is start to put the evidence together and make a case. 

Let’s take a look at what the Stock Market Almanac has to say about some clues.   Their research indicates that we have entered a not so favorable time period for the stock market.  Their research indicates that the best time to be invested in the market is between November and April and the worst time is between May and October.  The old saying goes “sell in May and go away.”   Dating back to 1950, their research shows an average gain of 0.1% for May through October and 7.3% for November through April.

The six month period between May and October is negative 41% of the time versus 24% of the time for the other six months.

They also turn to another sign that can be evident of a stock market that is changing back to a bear. They have studied 30 years worth of data that shows negative Fridays followed by negative Mondays is characteristic of a negative change in the stock market.  Of course, you have to see this a high number of times.  We are starting to see that pattern emerge.  

I also like to look at what is referred to as moving averages.  Just consider them as important levels in the stock market that you want to be above and not below.   Above these certain moving averages, things are positive and below these moving averages, things are negative.  As long as a stock market stays above or below these moving averages, it is an indication of either a positive or negative future.

The S&P 500 went below the 200 day moving average May 20th.  That price level for the S&P 500 is 1205.  It is negative as long as the market stays below that price level.   During the 2008 bear market, the S&P 500 fell below the 20 day moving average on December 26, 2007 and stayed below it until March 18, 2009.  During that time period, the S&P 500 lost -46%.

Those are just signs that tell you how the market is handling the risk that is present. The problems that are creating these losses in the stock market are real and see no sign of slowing.  As I wrote weeks ago, I am inclined to think that BP has no solution for the gulf oil spill and is just doing damage control.  The White House is telling everyone how they have been on the problem from day one which is furthest from the truth.  The only fix is a long-term solution which means this problem doesn’t go away until August at the earliest.  Can you imagine what this is going to do to that region of the country initially and then to our country economically?  It is truly sad to watch this occur.  

The risks are real.  Make sure that you are comfortable with the risk that you are taking.

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There are hundreds of signs and indicators that can be predictive.  I wanted to run a few by you this week as food for thought.

(1)               The January Indicator

The old saying goes “so goes January so goes the rest of the year.”  During the last 59 years, January has had a negative return 23 times.  This was the result of those negative first months of the years:

13 of those years ended negative

4 years had a greater return than 4.5%

6 years finished the year with a return of less than 3%

On the percentages, it has been a pretty accurate predictor of things to come (Stock Market Almanac).

(2)    The December Low Indicator

Lucien Hooper, a Forbes columnist and analyst, coined a stock market warning sign called the December Low Indicator.  If the stock market anytime during the first quarter goes below the lowest price level of the preceding December, a warning sign appears.  This occurred on January 22nd.  The Stock Market Almanac further researched this sign and found that this has occurred 30 times since 1952.  When you combine a negative January and the December low indicator, the stock market ended those year negative 75% of the time. 

(3)  The Decennial Pattern

There are many studies that look at the significance of cycles.  For instance, there are studies that determine which year of the 4 year term of a President is likely to be either positive or negative.  There is a look at the 7th year of every decade.  The number 7 stands for panic.  You can literally go back and look at every 7th year dating back to 1887 and see some type of panic.  The two more famous panics would be the stock market crash in 1987 and then the start of the financial crisis in 2007.

There is also a look at the tenth year of every decade.  Out of any year of a decade, the 10th year is by far the worst year on average.   Tenth years have the worst record within the Decennial Cycle and 2010 is a midterm election year, which has the second worst record of the 4 year presidential election cycle.  Of the last 12 occurrences dating back to 1890, the stock market lost money 8 out of the 12 times during the 10th year.  The average loss has been -7.2%.   

 Year                 % gain or loss

 1890                -14.1

1900               + 7

1910                -17.09

1920                -32.9

1930                -33.8

1940                -12.7

1950                +17.6

1960                -9.3

1970                4.8

1980                14.9

1990                -4.3

2000                -6.2

2010                ???

 These warning signs might end up amounting to nothing.  At the same time, it also might be prudent to pay attention to what the signs are saying and making sure that you have a Plan B.

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There is an indicator for everything.  There is a prediction based on who wins the Super Bowl.  There is a prediction based on the length of skirts for a particular year.  The list goes on and on. 

The unusual nature of some of these indicators is their accuracy.  For instance, there is the January Barometer. Every negative January in the S&P 500 since 1950 without exception has preceded a new or extended bear market.  (Stock Market Almanac)

Then there are the first 5 days of January.  The stock market has finished positive 85.7% of the time when the first 5 trading days of January are positive in the S&P 500. (Stock Market Almanac)

Then there is the famed Santa Claus Rally.  The old saying goes, “If Santa Claus Should Fail to Call Bears May Come to Broad and Wall.”  The stock exchange is located on the corner of Broad and Wall Street. 

Failed Santa Claus Rallies have a tendency to precede bear markets.   Ironically, in 2008, the Santa Claus Rally was a positive one.  However, January was a negative month.  I think that both accurately predicted the future.  The year is obviously going to end on a solid note.  However, February and midway through March was horrific.    Thus that ended up being an extension of the bear market. 

I only write this for a little fun.  You don’t make decisions based upon these indicators.  However, you do make your decisions based upon risk factors.  Today, they are high. 

I don’t really want to get into predictions for the New Year.  I learned a long time ago that predicting is a tough game.  However, I will spell out in a few weeks what I see in 2010. 

Well, I am going to take off a few weeks and enjoy my family and some much needed time off.  So, this will be the last market outlook of the year.  I hope that you know how much I appreciate you listening to the radio show and/or reading my writings.  I hope that you and your family have a very Merry Christmas!!!

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