Welcome to the TFC Commodity Trading Forum.
Please feel welcome to join in on these informative ongoing discussions about trading futures and commodities.

The Trading Forum is intended for the open discussion of commodities trading. The management of this Forum does not agree or disagree with the ideas exchanged, and does not exert editorial control over the message posted herein. Read and post at your own risk. The risk of loss in trading or commodities can be substantial. We discourage the use of this Forum to promote trading that is acknowledged to be risky. Please note: many links from the Forum lead to pages on other web sites. We cannot take responsibility for nor endorse the information presented on those sites.

TFC Commodity Trading Forum

Most Telling Five Days of the Year

Kaeppel's Corner: The Most Telling Five Days of the Year

Jay Kaeppel, Optionetics.com
January 5, 2011

First the short version: if the Dow Jones Industrials Average closes on January 7th, 2011 above 11,577.51, then another “arrow” will be added to the bullish “quiver.” Now back to the long version.

Last week I wrote about the seeming cause and affect regarding the “Lame Duck Amendment” to the United States Constitution and certain seasonal/cyclical trends regarding the four year election cycle in the stock market. Speaking of “lame”, I also incorrectly referred to it as the “12th amendment” to the United States Constitution, when in fact it was the 20th amendment. So let me correct the record. The 20th amendment was passed into law on 1/23/1933 and served to move up the date that new Congress members were sworn in to January 3rd and Presidents and Vice Presidents on January 20th.

As an aside, at this critical juncture in our nation’s history, I am encouraging everyone to contact their elected representatives and announce their support for my own newly proposed “Lame Bum Amendment.” It goes like this: Any re-elected Senator or Representative whose votes in the previous term raised the deficit, don’t get sworn in again until January 3rd following the NEXT election (assuming they win again then). Hey, it’s a start.

Anyway, this week let’s look at another seasonal trend that completely “flip flopped” after passage of the 20th amendment.

The First Five Trading Days of January

This is another seasonal trend first introduced by Yale Hirsch of Stock Trader’s Almanac fame (note to myself: steal article ideas from someone besides Yale Hirsch once in a while). Under the category of “Yes I know it sounds ridiculous, but it actually has been pretty useful” (another note to myself: work on getting better category titles in 2011), the first five trading days of January has served as a reasonably good predictor of bullish stock market behavior over the years – or as we will soon see, at least since the 20th amendment was passed.

-For our purposes we will look at the performance of the Dow Jones Industrials Average during the first five trading days of each calendar year. If the Dow shows a net gain during the first five trading days of the calendar year we will designate this as “bullish”. If it is unchanged or shows a loss, we will designate this as “bearish.”

-From there we will track the performance of the Dow during the remainder of the calendar year depending on whether the Dow registered a gain during the first five trading days or not.

-First we will first test the period of 1/1/1900 through 1/23/1933 – the day the Lame Duck Amendment was passed - and then from 1/23/1933 to the present day.

First Five Days of January: 1/1/1900 to 1/23/1933

Not to give anything away but from 1900 through the passage of the 20th amendment the “The First Five Days are Up is Bullish” theory was a disaster. Oops, I think I gave it away. In any event, the blue line in Figure 1 displays the growth of $1,000 invested in the Dow only after the first five days of the current calendar year registered a gain. The red line displays the growth of $1,000 invested in the Dow only after the first five days of the current calendar year registered a loss or no change.

Figure 1 – Growth of $1,000 invested in Dow if first five days of January show a gain (blue line) versus growth of $1,000 invested in Dow if first five days of January shows a loss (red line) – 1/1/1900 through 1/23/1933

For the record, between 1/1/1900 and 1/23/1933:

-Investing in the Dow only after the first five trading days of a calendar year showed a gain, would have resulted in a loss of -54.9%.

-Investing in the Dow only after the first five trading days of a calendar year showed a loss, would have resulted in a gain of +104.5%.

Whether a coincidence or not, things changed quite dramatically following the passage of the 20th amendment on 1/23/1933.

First Five Days of January: 1/23/1933 through 12/31/2010

The blue line in Figure 2 displays the growth of $1,000 invested in the Dow only after the first five days of the current calendar year registered a gain since 1/23/1933. The red line displays the growth of $1,000 invested in the Dow only after the first five days of the current calendar year registered a loss or no change over the same time.

Figure 2 – Growth of $1,000 invested in Dow if first five days of January show a gain (blue line) versus growth of $1,000 invested in Dow if first five days of January shows a loss (red line) – 1/23/1933 through 12/31/2010

For the record, between 1933 and 2010:

-Investing in the Dow for the rest of the year only after the first five trading days of a calendar year showed a gain, would have resulted in a gain of +7,594%.

-Investing in the Dow for the rest of the year only after the first five trading days of a calendar year showed a loss, would have resulted in a gain of +145%.

-After the first five trading days of the year see the Dow register a gain, the Dow registered a gain during the rest of the year 40 times (81.6% of the time) and a loss only 9 times (18.4% of the time).

Summary

So the key thing to note is this: since 1933, a gain by the Dow during the first five days of January has been followed by higher stock prices for the remainder of the year about 82% of the time. Needless to say there are “a few” other factors that “might influence” stock prices over the course of a year.

Still, one of our jobs as investors is to accumulate as much useful evidence as possible to assess the current and future trend of the market. Given that we are in a pre-election year (the last 17 pre-election years showed a gain for the year) and that the major averages are all trading above their long-term moving averages, an “up” first five days of January – i.e., a January 7th, 2011 Dow close above 11,577.51 - would be one more arrow in the bullish quiver.

A Happy New Year indeed (hopefully)!

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ You’re Options Education Site