Have you had this question cross your mind? Where the Stock Market is going in 2013?
When looking at the Market alot of traders look to see what the past has done, but past performance is no guarantee of future returns, But it still makes sense to look at historical data-because that’s the way to bet it.
Optimism about the economy and the political scene brought strong gains for the stock market in 2012, despite occasional jitters over the so-called fiscal cliff. There are reasons to think the rally will continue through 2013. Europe is getting better. China is stronger. Maybe our own economy will pick up as unemployment goes down, consumers build confidence, and politicians agree to compromise.
History also tells us that the first year of a new presidential term is often less kind to the stock market. Ned Davis Research ran the numbers long ago and found that stock market returns during the first year of a presidential term (including re-election terms) average only about 5 percent. Gains for the second year are even less, averaging just 4 percent. It’s the third year of a presidential term that produces the biggest gains, averaging 12 percent, and then the fourth year, like 2012, typically tacks on another 8 percent increase. In other words, the last two years of a presidential term produce much stronger gains than the first two years. So unless you think that President Obama will be better than average, 2013 will likely be a lean year.
A study by Marshall Nickles of Pepperdine University reveals a more foreboding future for 2013. Nickles tested data from 1952 through 2000 and found that an investor who bought stocks and held them for the first two years of presidential terms, then sold them, would have made money six times, and lost money seven times. In the end, because the losses were bigger than the gains, the investor would have lost nearly half his money. Compare those results to the investor who bought and held stocks in the second half of presidential terms, then sold on the day the presidents were inaugurated. That investor would have made money every time, for an overall gain of more than 7,000 percent.
So another indicator to watch for is the so-called Santa Claus rally. Yale Hirsch of The Stock Trader’s Almanac looked at the last five trading days of the year plus the first two of the new year. Since 1950, those seven days have averaged a 1.5 percent gain in stock prices (an annualized rate of over 50 percent). He also found that this Santa Claus rally often predicts the next year’s market. If the Santa Claus rally arrives on schedule, it’s a good sign. If it doesn’t, then the following year often turns bearish.
Those who ignore history do so at their own peril. To borrow a phrase of another president, Teddy Roosevelt, from over a hundred years ago: As you go into 2013, walk softly, and carry a big cash balance.
With trading stock or options look to see where the money is flowing by seeing what sectors are moving.
Happy Trading and may your portfolio increase during 2013!