Two Market Forecasting Tools For 2013

01/15/13 08:30:23 AM

by Matt Blackman

Traders are constantly on the lookout for indicators that give them a leg-up on everyone else. Here are two indicators that should help.

Security: SPY,DIA
Position: Buy

As the first month of the year, January can tell us much about what the year holds for our stock portfolios according to Yale Hirsch, founder of the "Stock Traders Almanac." Here are two indicators he developed more than 40 years ago that have withstood the test of time.

First five days
How stocks perform in the first trading days of January has historically had a high correlation with where the market is headed for the rest of the year. In the last 39 years, Januarys in which the Standard & Poor's 500 was up in the first five trading days of the year closed the year with gains 33 times for an accuracy of 85%, according to the 2013 "Stock Traders Almanac." The six exceptions occurred mostly during bear markets or with the onset of war.

FIGURE 1: SPX, HOURLY. Here's an hourly chart showing the performance of the S&P 500 since the beginning of the year, with a respectable gain in the first five days of 2.2%.

Graphic provided by: TC2000.com.

So how well did the first five day indicator perform in down years? According to the almanac, in the 23 years in which the index lost ground in the first five days, 12 were up years and 11 were down, giving the indicator a forecasting accuracy of 47.8%. See Figure 1.

It worked out a little better in the years following Presidential elections. In nine of the last 15 post-election years, the SPX lost ground during the first five days of January, and six of those were losers by year-end.

FIGURE 2: SPX, DAILY. Here's a daily chart of the S&P 500 over the last 14 months. Between January 1 and December 31, 2012, the index gained more than 13%. Both the first five days indicator and the January barometer were positive.

Graphic provided by: TC2000.com.

January barometer
Another indicator discovered by Yale Hirsch was one he called the January barometer, which says how the SPX performs for the month of January has value in forecasting index performance for the rest of the year. According to Hirsch, the barometer has only failed seven times in the 62 years since 1950. During post-election years, the January barometer has accurately forecasted full-year performance in 12 of the last 15 occurrences. See Figure 2.

Although they don't tell us how powerful the move will be, both the first five day indicator and the January barometer give us powerful hints of what likely lies ahead for the rest of the year. Now, thanks to the first five days, we know that chances favor an up year for stocks, and by the end of January, we'll have more information upon which to make a decision with a higher probability of success.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Two Market Forecasting Tools For 2013

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