Stocks began the year with a thud. In fact, it was the worst start to a trading year… ever.
That of course means that the “First Five Days” forecasting tool, which I wrote about back on December 31, came in decidedly negative this year.
So let’s talk about what that means for stocks in 2016.
First, I should clarify what I mean by “forecasting tool,” because unfortunately, it’s just an indicator – NOT a crystal ball.
It’s not as simple as saying: If the first five days of January are down, then the entire year is destined to be a loser.
(That would be too easy.)
In fact, there are plenty of examples of when stocks fell for the first five days of January… only to go on to produce positive returns by year-end.
1927 is one example – stocks fell 1.1% in the first five days, but ended the year up 27.7%.
The next year, 1928, is another example – stocks started with a stumble, then gained 49.5% by year-end.
But those are extreme examples. In fact, those were the two strongest years that followed a negative first-five-days period.
Now, consider an example from the other extreme: 2008.
In 2008, stocks fell 5% during the first five days of January. They then went on to fall a devastating 33.8% throughout the year.
My point in walking you through examples on both ends of the spectrum is to show that the stock market has produced a wide range of returns – both positive and negative – following a negative First-Five-Days period.
But that doesn’t mean we should give up and resort to throwing darts at the wall. There’s still a lot of value in taking a “temperature check” of stocks after the first five days of January… and then deciding how much you want to risk in the stock market throughout the year. Because a deeper analysis – beyond one-off examples – shows that stocks are a less-favorable bet in years that begin soft.
Stocks might go up this year… but the probability of them doing so is only 56%, compared to 73% when stocks start the year strong.
Stocks might produce a positive return this year… but historical statistics show that if stocks go up, they’re more likely to produce a below-average return.
That means long-term, buy-and-hold investors are facing rather unfavorable odds in 2016. Basically, weaker returns… if any at all.
And while poor performance isn’t a guarantee, it sure makes sense to take protection actions today. And it’s certainly a great time to consider a more nimble approach to investing in the markets.
Adam O’Dell, CMT
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