Courtesy of John Nyaradi.
3 Seasonal Indicators Go Green
John Nyaradi: Hi everyone, I’m John Nyaradi, publisher of Wall Street Sector Selector, a financial media site specializing in exchange rate of funds and global economic analysis. Today, I’m really pleased to welcome our special guest, Jeffrey Hirsch. Jeff, welcome to Wall Street Sector Selector.
Jeffrey Hirsch: Great to be with you again.
John Nyaradi: Jeff is President of the Hirsch Organization and Editor-In-Chief of Stock Trader’s Almanac. He appears frequently on CNBC, CNN, Bloomberg, Fox Business, and many other national and international media outlets. Stock Trader’s Almanac is a perennial bestseller offering insights into seasonality and historical trends. He’s also the author of a recent bestseller “Super Boom: Why The Dow Will Hit 38,820 And How You Can Profit From It.”
Jeff, let’s start with seasonality and discuss The Santa Rally. That’s a widely publicized seasonal indicator. Just tell us a little bit about it and what happened this year.
Jeffrey Hirsch: Well, you know, people refer to any sort of year-end rally as the Santa Claus Rally, and it’s really not the case even though there is definitely a year-end rally. The Santa Rally is the last five trading days of the year and the first two trading days of the New Year, and its generally a bullish time, a lot of selling has waned, and a lot of people are busy doing other holidays things and not populating the trading desks or trading floors, and generally a professional bullish bias lets us get about an average gain of about 1-1/2% on the S&P 500 during that time.
But the significance of the Santa Rally is when that period of time is not up for the S&P, it’s been a harbinger of lower prices. We saw that in 2000 and 2008, and the other two times in recent years that there wasn’t a Santa Claus rally, in ’94 and ’05, we had flat years.
This year, Santa Claus eventually showed up and so we have a confirm that things are OK.
John Nyaradi: The next one we can talk about which you do some great work on is called “The First Five Days in January.”
Jeffrey Hirsch: Yes, The First Five Days are early warning indicators and this year it was positive, too. This indicator works much better on the upside than the downside, but in the years when the first five days went down, we see a very low average gain per year, about a percent, while on the up side, it’s several percent.
So we had a positive First Five Days and then the next one is for the whole month, The January Barometer. That’s the flagship indicator. My father, Yale Hirsch, created this in 1972. It simply states that as the S&P 500 goes in January, so goes the year. It turns out that it’s quite predictive. This year we have an up January, very positive, the biggest one since ’97. What we’ve seen since 1950 is that The January Barometer has an 89-1/2% accuracy ratio.
And then the other thing, we have this 4% gain in January which if you look back, for all the Januarys that had 4% gains, there were no losses for the full year following. Even in 1987 when we had the crash, the year ended up 2%. So the early indicators are quite positive for 2012.
John Nyaradi: Yes, it’s really three for three. The Santa Rally, First Five Days and January Barometer point to a positive 2012.
Jeffrey Hirsch: My overall outlook is that I think that the things we’ve seen in January will keep us positive, but I think the overhead resistance technically, the geopolitical situation, problems in Europe, our deficit, the election, all of these can take a little bite out of the middle which coincides with the weakness in the spring and summer.
John Nyaradi: One of the interesting things you write about is the Three Peaks and the Domed House as a technical indicator. Can you talk about that?
Jeffrey Hirsch: Sure. It’s an old technical pattern that was developed or discovered by the late great technician, George Lindsey. Lindsey found that the market’s pretty much in this type of a pattern about 60% of the time, and that most tops occur with the three peaks and the domed house top. Last year it helped us forecast and be prepared for the downdraft that we had, technically a bear market by Ned Davis standards.
And it’s a cutesy name, but basically, what you’re looking at is a pattern where you have the market making three attempts at a new high, which we see very often, then failing, breaking through to a new low, then off that low rallying up to that new high, then coming back to that previous low.
There are different counts, but if you look at the top that we had in April last year, that would be the middle of the three peaks, and the drop down to the October low is what is called the separating decline, blowing through the previous two lows between the three peaks, and we have just climbed up to a new level of almost the previous highs.
My calculation is that it’s got a little bit more upside. Not much, and that we’ll probably go sideways for a little bit here, February being that notorious weak link in the best six months. I think we’ve got some upside, but not much, and other than that, I suspect we’ll succumb to seasonal, tactical and economic forces and fundamentals and settle back down throughout late spring and summer.
John Nyaradi: That’s great. Jeff, we’re talking here at the beginning of February, 2012. I always like to end these conversations by asking is there anything else you’d like to add the one thing that’s really on your mind right now that investors should watch out for the year as we move into the new year?
Jeffrey Hirsch: On the positive side, you know, the last seven months of the year are pretty strong with only two losses over some fifty or sixty years. And the thing that I think people are forgetting is that with a sitting President running for re-election, there’s been an average gain of 9% for the year with the only two real blemishes being in ‘32 and in 1941 with The Depression and World War II.
So the fact that there’s somebody in office running for reelection is positive because either this sitting President is doing well, and the market and the economy are responding, or come election time, the country is not happy, throws him out and there’s a rally in celebration that we got someone new in and we’re going to fix the problem.
So win or lose, it’s positive if there’s somebody in office that is running. The market does better when the President wins, not so great when they lose, but we usually get a year-end rally and big Novembers after an unpopular President is ousted.
John Nyaradi: Well folks, we’ve been talking with Jeff Hirsch, president of the Hirsch Organization. You can learn more about Jeff’s work by going to the link at the end of this interview and learn about the Stock Trader’s Almanac as well as his membership newsletters. Jeff, it has been wonderful chatting with you today. I know we’re all looking forward to talking with you again soon.
Jeffrey Hirsch: Oh, my pleasure again. Thanks John.
(recorded interview, edited for length and clarity)
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