Saturday, 9 February 2008

The annual forecasting powers of the January performance indicator

Some traders believe that by looking at stock market performance at the beginning of a year, during the month of January, one can get an idea of how the markets will perform over the remaining eleven months. While I am somewhat sceptical about the predictive power of this January Performance Indicator, we can nonetheless look at the charts and see what the magical candlesticks are telling us about the future. :-)

Here is the Dow Industrial Index chart for January 2008:


And this is the January 2008 chart of the S&P500 Index:


According the the charts above, a couple of common conclusions can be made. First, we can expect to see continuation of the markets' fall in late February-early March and then even a more accelelrated free fall in the middle of the summer, I guess in anticipation of and during the Q2 earnings season. The rebounds are likely to happen some time in April and May. Second, the markets are likely to rally in late August-September, pull back in October, again rebound and trade sideways in late October-early December, and then finally rally hard in late December to sweeten the poor annual performance.

Overall, the charts tell us that the indexes will finish the year in a negative zone, which is at odds with the 2008 prediction of another folksy market indicator, the Super Bowl effect, which I talked about in my previous posts here and here. By the way, the after-game rally last week did not really happen as a load of poop news and those overly talkative Fed officials (shut up already, you monetary gnomes!) made sure that the short-term rally did not continue.

Although not taking the conclusions from the January performance indicator seriously, I will still keep checking during the year (just for fun) if any of its predictions materilize over the next eleven months of 2008.

Disclaimer: The charts above were generated through the Bigcharts.marketwatch.com online charting tool, which I use frequently in my analysis of indexes and individual stocks.

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