January 3rd, 2011

As Goes the First Day, So Goes the Year?

Nothing personal but it was great taking a little break from writing the blog for the past week or so. But it wasn’t as exciting as today’s first day of trading in 2011 gain of 1.13%.

Which leads me to a statistic I head this morning on CNBC. Someone said that there’s a “near perfect correlation” between the first day of trading each year with how the trading for the whole next year will end up. In other words, if the first day ends up then the year will end up.

Well that sounded unbelievable so I turned to my database (back to 1963) and found that ….. it’s not true. Actually, over the past 48 years the market did end up 72.9%:

But in only a third of the years did a positive first day of trading “produce” an up year; the rest of those up years came when the first day of trading actually had closed down. Furthermore, less than half the first day of trading over the past nearly 50 years actually ended up. As a matter of fact, the market closed up for the year more times when the first day of trading closed down.

The real message here is that you can’t believe everything (or, sadly, nearly anything) you hear or read when it comes to projections about the future direction of the stock market. The people who make those prognostications know that the odds are low of someone actually verifying the veracity of their statements. They are usually more interested in being seen than in making a valid and usable point. So what should you do? Be skeptical, very skeptical, especially if you hear something that tends to confirm your own beliefs because that’s when you’re most vulnerable.

Over the last two weeks of December, I summarized to subscribers of my Instant Alerts service a range of both bullish and bearish statements from Wall Street professionals. Both sides have their heavyweights weighing in with opinions. They all sound so believable (except perhaps Doug Kass, the perennial bear or Jim Cramer, the perennial bull on theStreet.com …. but more on that in the next post).

By definition, the market always consists of nearly equal numbers of eager buyers and sellers. The weight of one over the other generates prices to move up or down only at the margin. The only thing I have always trusted is the sentiment of all buyers and sellers as reflected in the prices they were will to pay and accept and the trending of that sentiment over time.

Just before Thanksgiving, when the S&P 500 was 1197.84, or 6% lower, (see “Listen to One Opinion or the Sound of the Thundering Herd“) I wrote:

“I’ve established a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape. The projection is based on what I perceive to be continually strengthening upside momentum as measured by my moving average based Market Timing Indicator.”

Little did we know how much upward momentum there would be in December and that 2011 would begin just 4-5% away from that objective. Tech stocks have lead us up to this point but they’re getting risky and it’s questionable as to how much farther they’ll be able to carry us. Rotation will begin and I’m working now at finding those next potential leaders and assembling them into a new Watchlist 100.

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  • Anonymous

    The correlation that CNBC was referring to was movement of the S&P of more than 1% up or down on the first day of trading since 2000. Under those conditions, the annual movement of the market has had a perfect correlation to the opening day. The S&P rose 1.09% on January 3 putting 2011 into this decade of statistics. In time we'll find out if the trend can continue…