If Santa has not yet made his way to your investment portfolio, don’t despair. According to Jeffrey Hirsch (Stock Trader’s Almanac), the “Santa Claus Rally” normally occurs during the last five trading days of a year and the ensuing first two trading sessions of the new year. During this seven-day period, stocks historically tend to advance (by 1.5% on average since 1950), but when recording a loss, they frequently trade much lower in the new year.
With one of the seven sessions behind us, the S&P 500 Index is up by 0.9% and the Dow Jones Industrial Average by 1.0%.
Another old stock market saw tells us the first five trading days of January sets the course for January (known as the “First Five Days Early Warning System”), and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. “As January goes, so goes the year,” said Hirsch.
Lastly, according to Hirsch, the “December Low Indicator“ says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign of lower levels ahead. The numbers to watch are those recorded on December 19: 1,205.35 for the S&P 500 Index and 11,766.26 for the Dow Industrial Average.
After a strong performance of the major indices in January, the jury is still out on whether the January Barometer will be successful in 2011. The year-to-date performances show the Dow Industrial Average up by 6.2%, but the S&P 500 barely in positive territory with a gain of 0.6%. Looking ahead to 2011, time will tell whether the year-end/new-year indicators play out according to the historical pattern. Meanwhile, we’ll have some fun tracking how it pans out.