NOVEMBER 26, 2010.
Market Rules, Made to Be Broken .
By JONATHAN CHENG
Like a monetary El Niño, the Federal Reserve's $600 billion injection of cash into the financial system is upending the ordinary rhythms that govern the stock market.
This flood of money has roiled a host of market truisms, those time-honored seasonal patterns and urban legends that have established themselves as market lore.
Many investors hold on to time-honored seasonal patterns and urban legends during tough times. But these market "truisms" are anything but true this year. WSJ's Jonathan Cheng explains why to Simon Constable.
Just a glance at the past few months dashes four or five of the favorites in one swoop.
Take August. It is always a good month—well, mostly always. But not this year: The Dow Jones Industrial Average dropped 4.3% to notch its worst August in a decade.
September? That is known to be far and away the worst month of the year. Except in 2010, when it soared 10.4% for the best September since 1939.
And October, that is the scary month, right? Just look at 1929, 1987 and 2008. But not this time. October gave us a tidy 3.1% gain.
The list goes on. November ended virtually flat, thwarting two truisms in one: that the month is typically a strong one and that markets usually rally after an election (this year's was on Nov. 2).
Of course, those adages haven't always enjoyed a perfect track record, even in the best of times. After all, many of the mantras are based on averages, leaving room for wide swings. But none of them has stood a chance under the Fed's quantitative-easing program, first floated in August before a formal announcement in early November. The plan met with initial success, helping inflate asset prices and send the Dow up about 12% since late August.
"All this money that the government is throwing into the market is changing the rules," laments Keith Springer, president of Capital Financial Advisory Services in Sacramento, Calif.
Lesser-known rules have also fallen by the wayside.
One saying Jewish investors should sell at Rosh Hashanah and buy back in after Yom Kippur—quitting their positions to better focus on worship—also failed this year. Selling before Rosh Hashanah (Sept. 8) and buying after Yom Kippur (Sept. 17) would have caused investors to miss a nice 4.7% run in the Dow.
"Clearly, this old trading aphorism is exactly that: an aphorism, not a rule," investor Dennis Gartman wrote at the time in his eponymous investment letter.
With the year end approaching, a barrowful of others is being put to the test: The Thanksgiving week rally, which has the market rising in the lead-up to Thanksgiving, setting up a strong December; the Santa Claus rally, which has seen stocks gain an average 1.5% between Christmas and the first days of the new year, and the January effect, which sees a wave of late-December selling as investors try to reduce their tax burden, followed by early January buying.
The Fed's efforts have scrambled the usual signals for Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, which popularized the Santa Claus rally and other seasonal patterns.
Mr. Hirsch says the Fed probably can't be blamed for all of the disruption. In recent days, North Korea has roiled the traditional patterns.
"Thanksgiving has historically been a good week, but gunshots and artillery have been known to disrupt a number of seasonalities," Mr. Hirsch says. The Dow has had a mixed week so far, falling Monday and Tuesday before rising 1.4% on Wednesday.
Another in the offing is the Super Bowl indicator, which predicts stock increases in the years when a team from the National Football League's National Football Conference wins the Super Bowl—as the NFC's New Orleans Saints did in February.
So what about the favorite saw of "sell in May and go away?" If followed, it would see an investor selling at the beginning of May and buying back at the end of October. This was less disrupted by the Fed, whose influence wasn't really felt until August.
Investors who followed this favorite guideline would have sold near the high-water mark for the first half of the year. But waiting until the end of October to buy again, as the adage suggests, would have meant missing out on a powerful 11.3% rally that began in August.
Some, like Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, suspect that the very acceptance of an oft-repeated mantra will cause it to lose its magic.
"Once everyone knows about an indicator, odds are it won't work as well," Mr. Detrick says.
Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
0 comments:
Publicar un comentario