Could This Stock Market Pattern from 1994 Be Repeating?

January is a great month to be a trader.

There’s no better time to cast aside last year’s setbacks. The slate is clean, and new opportunities lie in wait.

And it’s not just symbolic. January is also a seasonally-strong month. As I’ll discuss in a minute, equity markets tend to perform well this time of year.

On that note — welcome to 2017!

Yes, 2016 was a difficult market. Fear and uncertainty were everywhere. Even though the market finished in the black, it was a volatile advance, with several sharp declines.

But here’s the thing: Tough periods often lead to growth and optimism. I’ve seen this many times. I believe this year has the potential to offer some great trends.

They say that bull markets climb a ‘wall of worry’. I couldn’t agree more. Just consider the current environment. Despite record highs in the US, many people remain on ‘crash alert’.

But do you know what?

It doesn’t matter what anyone thinks will happen. Quant Trader is only interested in the data. The algorithms calculate signals without emotion or bias.

I love this part of systems trading. I don’t worry about all the predictions filling the newspapers this time of year. I just let the market lead the way.

Expect what others don’t

OK, let’s start with a chart…

Source: BigCharts
Click to open new window

You’re looking at a graph of the All Ordinaries. It covers the past five years.

There are two key phases on this chart: a strong upward trend to September 2014, and a sideways period since. The last 28 months have yielded practically nothing.

Many people will look at this chart with despair. The long stretch of trendless price action will put them off stocks. They’ll expect the next 28 months to be just as hard.

But this is often a mistake.

I have another chart I want you to see…

Source: BigCharts
Click to open new window

This is the Dow Jones Industrial Average. The date range is 1992–95.

You’ll notice some similarities to the previous chart. Like the All Ordinaries graph, there are two distinct phases: a rising trend, and a lengthy sideways consolidation.

I remember the second phase well. There was a lot of nervousness — not dissimilar to today. The market had stalled after several good years. And memories of the 1987 crash were still vivid.

As a young trader, my view was that a tough year was going to get tougher. I wasn’t interested in buying stocks. I was only looking for opportunities to short the market.

Let me show you what happened.

Source: BigCharts
Click to open new window

How wrong I was. And it wasn’t just me. Many traders were preparing for a crash.

It’s all so obvious in hindsight. The trend was up — there was nothing on the chart to confirm otherwise. But, at the time, it appeared to be an ageing bull market.

My problem was that I had a bearish bias. You see, I wasn’t following the market — I was backing an opinion. The result was that I missed the beginning of a big trend.

Now, I’m not predicting history will repeat. But I know from experience that strong trends often emerge when few people expect them. This makes me optimistic about 2017.

The season to trade

So, is the start of the year particularly good for stocks?

Well, it’s interesting.

Let’s split the year into two halves — 1 November to 30 April, and 1 May to 31 October.

Which period do you think has been better for investors?

It turns out November to April wins hands down. Since 1936, the average return for the All Ordinaries during this period is about 5.1%. The average for the second half is around 2.4%.

A 2002 academic study by Bouman and Jacobsen goes even further (The Halloween Indication, ‘Sell in May and Go Away’: Another Puzzle). They crunched the numbers on 37 stock markets from around the world.

The results were amazing. November to April was noticeably stronger in 36 countries.

The next few months could be very interesting. Keep an eye on the All Ordinaries. A break above the nearby 2015 high would be a sign that upward momentum is building.

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s Note: Are you falling short of your goals? Do you find it a struggle to consistently make good profits? Don’t worry, you’re not alone. The stock market can be a tough place to navigate on your own.

Here’s something you should do — check out Jason McIntosh’s Quant Trader advisory service. It’s a fully algorithmic trading system for ASX stocks. Quant Trader scans practically every company. It then tells you when to buy and sell. I can just about guarantee you’ve never heard of some of the stocks it identifies.

Try it. See if it makes sense to you. It could change the way you trade forever.

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