The Santa Claus rally delivered again! Whether you're buying it or choose to ignore seasonal trends, there are very early signs of strength in the market this year according to some widely followed statistics. While the numbers may not change your investments, they're often used as small indicators of where the broader market is heading.
The traditional Santa Claus rally, as defined by the Stock Trader's Almanac is "the propensity for the S&P to rally the last five trading days of December and the first two of January an average of 1.5% since 1950." This year's seasonal gift sent the S&P 500 and the Nasdaq up 1.9%, and the Dow Jones Industrial Average up 1.6% during the seven trading sessions from 12/22/11 through 1/4/12.
"It's the first positive indicator of the year —there are several seasonal indicators," says Jeff Hirsch, president & editor-in-chief of the Stock Trader's Almanac. "It's a good sign; a better sign considering a lot of the risks and negative issues out there, so it helps me be comfortable with the positive outlook for 2012."
And it works both ways. If Santa doesn't deliver, it'll have believers ducking for cover, expecting some degree of weakness to prevail throughout the year.
"If there's something really negative going on and the market's down like in 2000 and 2008, it preceded really nasty markets," Hirsch explains. "It's a sign that there's some lifting of the really negative things out there or that they're already baked into the market."
But this is just the beginning. As Hirsch said, there are several widely followed indicators in January, including the entire month itself.
The First Five Days of January Indicator
Hirsch points to the next little piece of data that yields early indication of the market's direction: January's first five trading days. According to his data, a positive 5-day period leads to an 86.8% chance that the market will close the year higher. He admits it's a less reliable on the downside. If the first days of January are negative, there's a 47.8% chance of a down year. As of Friday before the open, the S&P 500 is up roughly 1.9% for the week.
The January Barometer
"The Granddaddy of the early year indicators is the January Barometer," Hirsch says. As coined in the Stock Trader's Almanac: As goes January, so goes the year. With an 88.5% track record for the S&P 500 since 1950, who wants to dispute it? The accuracy rate drops a bit to 77% if you include flat years.
"If all these things line up positive, that's an even better sign; or negative, is much worse," says Hirsch.
The December Low Indicator
Which leads to one more early warning curveball to watch for: The December Low Indicator. If the Dow closes below it's closing low of December —which is currently 11,766.26 hit on 12/19/11— in the first quarter, "it's a watch out signal."
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