A 100% Gains Guarantee?
There are no guarantees in the stock market.
No matter how good certain data look, you can’t bank on the past to predict how prices will react with perfect certainty.
But what if I told you there was a 100% chance the market would finish out 2013 in positive territory? I hope you’d call me a liar. After all, there’s no way I could make that kind of promise. No one can.
However, I did stumble onto some very interesting data that have been perfect in their predictions since 1945. And they tell an interesting story about what could be in store for the market later this year.
More on that in a minute…
First, let’s take a look at how the market has reacted to a pretty substantial amount of news and interference over the past two weeks.
After a quick, nasty drop, stocks are percolating once again in the face of some nasty news. Italy and the entire eurozone continue to move closer to complete financial annihilation. And our now sequestered government continues to bicker over a few crummy budget cuts.
So there’s the bad…
But there was also some good mixed in. Last week, we saw some very upbeat housing data. GDP revisions weren’t terrible — and the market didn’t even seem to take notice. There aren’t a lot of data on tap this week, so the biggest curveball moving forward in the short term is likely headline risk related to Italy or sequestration.
Still, there’s a ton of new fear injected into the markets. One look at the most recent American Association of Individual Investors sentiment survey shows that bullish sentiment dropped more than 13 points last week.
This brings us back to our curious market pattern. The data are courtesy of Sam Stovall of S&P Capital IQ. Stovall just issued a report that shows there have been 26 instances since 1945 where the S&P 500 posted gains in both January and February. (February is usually a weak month for stocks. In fact, the S&P barely squeaked out gains to end the month this year.)
According to CNBC:
“In all 26 instances, Stovall says, the ‘500’ recorded a positive calendar year total return, averaging an advance — including dividends — of 24% and posting full-year results that were in the single digits just twice: 1987 and 2011.”
Those are spectacular results.
Does it mean that the market is guaranteed to finish the year with impressive gains, since the first two months ended in the green? Absolutely not. Even though we haven’t seen a miss in nearly 70 years, there’s no way to say with certainty that stocks will finish the year with gains — much less with gains as high as 24%.
Even if we take away any sort of guarantee, there’s still reason to be optimistic. Historically, the first two months of the year aren’t particularly strong together. That’s something significant. So even if we do get some form of an extended pullback this spring or even later in the summer, we can point to strength earlier in the year as a confidence boost going forward.
After all, when the market starts the year off on the right foot, it tends to follow through…
Greg Guenthner, CMT
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