CHAPEL HILL, N.C. (MarketWatch) — Does stock-market strength beget more stock-market strength? It’s human nature to think that it does. And the three “amazing” facts that I discuss below are evidence that this implicit belief is very strong right now. But, in true contrarian fashion, the market all too often ends up doing just the opposite of what human nature would have us believe. That’s why huge amounts of money gets invested right before market tops, just as large amounts of cash get pulled out at bottoms.
Keep this in mind as you confront the breathless cheerleading among some bulls right now about the stock market’s recent strength. Here are three of thee “amazing” facts that the cheerleaders are noting — whose significance is not nearly as bullish as they would have us believe: Amazing fact No. 1: Market has been unexpectedly strong since May Day – This factoid refers to the Halloween Indicator, of course, which is based on the historical tendency for the stock market to turn in its best returns between Halloween
and May Day (the “winter” months). In contrast, the stock market historically has been flat during the other six months of the year — the so-called summer months between May Day and the subsequent Halloween. Not this year, however. Since the beginning of May, the Dow Jones Industrial Average DJIA -0.39% has gained nearly 5%, leading some bulls to forecast even better returns in the seasonally favorable six-month period that begins this Friday. But there is no statistical support for this forecast. Upon feeding into my statistical software the Dow’s historical data back to its creation in 1896, I found no statistically significant correlation between the stock market’s performance during the summer months and the subsequent winter period.
To the extent there was a correlation, furthermore, it was inverse — a positive summer was more likely to be followed by a negative winter, and vice versa. It wasn’t statistically significant, so we shouldn’t make too much of this. But I mention it nonetheless because it means that if the cheerleading bulls bothered to look at the
historical record, they would be more cautious than usual — not more bullish. Amazing fact No. 2: Market’s year-to-date 2013 returns have never been negative It turns out that the broad market averages have never registered a closing price this year lower than where they stood at the end of 2012 — a very rare event. But so what? How have stocks performed following past years in which the same has been true? I haven’t seen anyone bothering to answer this crucial question, even though the factoid itself has been widely noted. And I think I know why: The answer is disappointing.
Source : marketwatch.com/story/3-amazing-facts-about-the-stock-market-2013-10-29