who to trust, bull bears and barometers

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Investment companies spend billions for their research department to identify risk and opportunities in the stock market. Analysts work fervently studying trading activity, market cycles, and economic trends to determine a repeatable pattern (barometer) that when duplicated can be an accurate predictor of a future direction. In many cases, once a barometer has been identified or worse widely published, its reliability is altered or compromised as investors adjust their trading strategy. We find that once a barometer loses credibility, investors and analysts move on to find the next discovery, commonly mislabeled as the next “crystal ball” future predictor.

Over the past two decades, we have collected and depended on more than a dozen barometers that have been reasonably reliable to determine our company’s investing strategy in the stock market. They include Elliot Wave Theory, Moving Averages, Option Put/Call Ratio, and Investor Sentiment to name a few. At Harris-Bay, our real estate private equity company, we have another set of barometers which also determine risks and buying opportunities in cities nationwide. These measurements include the affordability index (average incomes to average mortgages), property listing duration, unemployment, job growth, and economic growth rates.

Simon Maeirhofer, editor, and founder of the iSpy ETF Newsletter introduced me to a combination of three barometers that have proven to be reasonably accurate in predicting the S&P 500 trend for the calendar year. Individually they have been somewhat dependable, but this year all three have lined up for an unusually reliable prediction. The three barometers are:

  • Santa Claus Rally – December 26 to 31
  • First Five Days of January
  • January Barometer

Although many investors are familiar with one or more of these barometers, Simon creates one barometer by combining the three for efficient research. Last week Simon provided the following analysis of this year’s three in one barometer:

“For the first time since 2013, and for the 18th time since 1950, the Santa Claus Rally (SCR), First 5 Days of January (F5J) and January Barometer (JB) were all positive. When this happened in the past (shaded green boxes in chart below), the S&P 500 ended the year with gains all 17 times.”

ispyetf Market
Market Barometers

We turned bullish on the US stock market November 30 and remain favorable for 2017 (although we do anticipate some correction of 3-5% in the near term due to the fast pace of the post-election rally). As identified in previous updates, the entire gain of the “Trump Rally” was earned from November 9th to December 13th, with only a 1% gain since.

spx 11.8.16 - 2.6.17 Market

WHAT DOES THIS MEAN TO ME?

Our view is that investors moved the index up following the election based on optimism of relaxed regulations and lower taxes. It appears investor have taken a buying time-out to evaluate Q4 2016 earnings and the timing of Trump fulfilling his promises. While we project an overall positive trend of US stock indices for 2017, history indicates that investors can be impatient during the implementation of legislative changes, specifically tax law changes. We will probably view market declines as buying opportunities. The challenge to investors will be if the market begins a steep selloff akin to the 24%-year long decline that started in late 1982 after Reagan passed the Economic Recovery Tax Act (ERTA) we discussed last week. As in all wealth building strategies, investors will need to monitor their investments and limit losses during volatile periods. We remain optimistic in the belief that the past 16 years of gain/loss-cycles has transitioned into an overall long-term growth trend of the US stock market and economy that will reward patience.

Let us know your thoughts on this Update or contact us if you have any questions about your financial planning and investing goals!

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