Wednesday, November 5, 2014

Hirsch, Stock Trader’s Almanac 2015

The Stock Trader’s Almanac is now in its forty-eighth edition. It remains a must for traders who use seasonal factors to time the market.

The spiral bound, navy-covered almanac opens flat for easy access to its data or for jotting down notes. The format remains essentially the same, with a calendar section, a directory of trading patterns and databank, and a strategy planning and record keeping section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only seven significant errors in 64 years), and the January barometer in graphic form since 1950. Each trading day’s entry on the recto pages includes the probability, based on a 21-year lookback period, that the Dow, S&P, and Nasdaq will rise. Particularly favorable days (based on the performance of the S&P) are flagged with a bull icon; particularly unfavorable trading days get a bear icon. A witch icon appears on options expiration days. At the bottom of each entry is an apt quotation. There’s about a five-square-inch space in which to write. New this year is a three-page section in which “some of the best minds on Wall Street” offer their outlooks for 2015.

The Stock Trader’s Almanac pays particular attention to the presidential cycle, and it bodes well for 2015. Pre-presidential election years are the best performers in the cycle. “There hasn’t been a down year in the third year of a presidential term since war-torn 1939, Dow off 2.9%. The only severe loss in a pre-presidential election year going back 100 years occurred in 1931 during the Depression.” (p. 20)

The presidential cycle isn’t the only thing 2015 has going for it. “The fifth year of the decade is also the best year of the decennial pattern by a long shot with only one loss in the past 13 decades.” (p. 6)

Enjoy it while it lasts, since Jeffrey Hirsch expects a bear market after 2015, “taking the market 30-40% lower into 2017-2018 into the range of Dow 11,500-13,500.”

What other seasonals are powerful? The best six months strategy still works. “Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.” In 64 years the Dow gained 17432 points during these months and lost 1066 points during May through October. The S&P gained 1790 points in the same best six months versus 75.5 points in the worst six. And applying a simple MACD timing indicator nearly triples these results.

The first months of quarters are the most bullish, and the first trading day of the month outshines all others combined. You read me right: “Over the last 17 years the Dow Jones Industrial Average has gained more points on the first trading days of all months than all other days combined. While the Dow has gained 8868.89 points between September 2, 1997 (7622.42) and May 16, 2014 (1649.31), it is incredible that 5468.22 points were gained on the first trading days of these 201 months. The remaining 4003 trading days combined gained 3400.67 points during the period. This averages out to gains of 27.21 points on first days, in contrast to just 0.85 points on all others.” (p. 86) By the way, 2014 did not continue this tradition; during the first trading days of the first five months it lost 562.06 points (-135.31, -326.05, -153.68, 74.95, and -21.97).

This almanac is chock full of data that will delight those traders who believe that past is prologue. Even those who are skeptical have to pay attention to data that seasonal traders rely on and that therefore tend to move markets.

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