Usually when someone offers up a stock market forecast, I run the other direction. However, it’s still a good idea to keep the market’s seasonal trend in mind as the year unwinds.
Seasonal trend? Absent of widespread news, investors rely on ritual. The stock market reflects the ritual since it’s basically a peek into the anxiety-filled ADD mind of an investor.
I wrote about market seasonality in a previous post. ”Seasonality” is one of the rituals (or patterns in collective thinking) that investors fall back on absent of major news. Reversion to the mean is another phenomena that can affect trading patterns absent of news.
Current conditions like interest rates, government composition, and global news that impacts US GDP will make investors zig when they normally zag. Nevertheless, investors — like die hard sports fans — tend to go back to rituals that worked in the past if they don’t have something new to react to in the present.
In fact, correlation to seasonality has been significant (or not insignificant) for the past 20 years. The correlation was approximately .4 in 2012 — not bad.
Here’s a comparison of a seasonal 2012 DJIA index (in red) to the actual DJIA (in purple). The seasonal index considers incumbent presidential years where the incumbent was a favorite to win. The red line is a 14-day moving average that smooths out differences in days of the week when I averaged across years:
Here’s a seasonal index for 2013 that reflects seasonal market trends the first year after an incumbent was re-elected:
I was surprised at January which I’m thinking may not be a great month in 2013. And it’s skewed because we haven’t had many re-elected incumbents in modern times. But overall, this looks possible to me.
In other words, Q2 2013 may be solid once we get Fiscal Cliff noise out of the way and start focusing on leaving Afghanistan. In fact, if leaving Afghanistan is uneventful, if Middle East trade can reinvigorate by the end of Q3 2013, and if the Eurozone ticks off more fiscal successes (even small ones); we may see a new DJIA bottom in the 13,000′s.
Getting a new bottom is a fading fad in the pop and reality star worlds. But in the stock market, it’s an ongoing thing that we run towards. We just may get it if those “if’s” work out.
Image Credit: Twitter
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