3 Forecasts for 2016 Are About to Roll In!

AdamAs the holidays wind down and a new year begins, the stock market will be chock full of clues as to the future… if you know where to look for them.

And a few of them are literally right around the cornrner.

The Stock Trader’s Almanac is a popular resource that includes a trove of data-driven forecasting tools I’ve always found useful. Statistical analysis shows these tools have the ability to forecast (likely) future returnrns – and alert investors to (potential) periods of outperformance and underperformance.

Today, I’m going to dive into three of these – the “Santa Claus Rally,” the “First Five Days” period, and the “January Barometer.”

The so-called Santa Claus Rally spans the last five trading days of December and the first two trading days of January.

The rally is remarkably consistent. It’s occurred nearly 80% of the time over the last five decades. And it’s produced an average returnrn of 1.4% – far better than is typical for any seven day period.

But there’s also a strong forecasting element to this seasonal tendency. Specifically, when a Santa Claus Rally fails to occur… stocks tend to underperform through the first quarter of the new year.

With the appearance of a Santa Claus Rally… stocks gain an average of 1.3% between January and March.

Without the rally… they gain just 0.6%.

So if you’re wondering whether you should get bullish in early January, you should wait to see if a Santa Claus Rally makes an appearance this year. If it does… the odds are on your side.

But after the first quarter, Santa Claus’ forecasting power fizzles out.

Annual returnrns with the rally are 5.3%, versus 5.1% without it. That’s a slim and meaningless difference. Clearly, this is where the Santa Claus Rally’s forecasting power falls short.

But that’s where the “First Five Days” comes in. This period has the power to forecast returnrns for the entire year.

Historically, when stocks are up in the first five days of January… they go on to produce an average returnrn of 8% through year end. But when stocks are down for the first five days of the year, they produce a milder 6.3% returnrn – a profit reduction of about 20%.

What’s more, positive annual returnrns are much more likely when stocks are up during the first five days – with a win-rate of 73% (versus 65% when stocks begin the year weak).

I found another interesting conclusion from my data dive. But it pertains to a shorter, three-month timeframe… the one we target in my Cycle 9 Alert service.

I can’t go into it all the nitty gritty details here, but both the First Five Days period and the January Barometer (which I’ll get to next) can also give profitable clues about how stocks are likely to trade in February, March and April – one of the most favorable times of the year to be in stocks, particularly if we get those early-year signals that I’ll be watching for.

These shorter-term signals are often overlooked by investors, especially ones who are stuck in a long-term mindset. “To each his own,” as they say… but I think it’s a mistake to pass over high-probability opportunities to make a quick buck. And that’s why I’ve designed Cycle 9 Alert to capture those two- to three-month moves.

Finally, there’s the so-called January Barometer, a seasonal patternrn that suggests: “As January goes, so goes the year.”

Basically, if stocks are up in January… expect a bullish year. If they’re not, well, brace yourself for a rough year.

By my analysis, annual returnrns are nearly 70% stronger – 7.9% versus 4.7% – following a positive January.

Plus, positive annual returnrns occur 75% of the time following a positive January… versus just 54% of the time following a negative January. That’s a huge difference in odds!

Of course, it’ll still be several weeks before all the data comes in… before we know whether the Santa Claus Rally makes it to town this year… and before we have a chance to take the market’s “pulse” in January.

But I’m watching these forecasting tools closely, and I’ll give updates as the data comes in.

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research