An Early Warning of Trouble?

Posted by: Ben Steverman on January 8, 2008

My Stock Trader’s Almanac 2008 says the first five days of the year are an “early warning system.”
If you believe that, start worrying. The S&P 500 dropped 5.3% in the first five trading sessions (Jan. 2, 3, 4, 7 and 8) of 2008. That’s the worst at least since 1950.
If stocks post a gain in the first five days of the year, they’ve gone on to provide gains for the whole year 31 of 36 times, the almanac says. If they post a loss, it’s more likely to be a tough year, with stocks up just 11 out of the 21 years.
Yes, the market’s performance since the New Year is disturbing. But this “early warning system” strikes me as too unreliable and arbitrary to be helpful. Why five days? What’s so special about the beginning of the year? The several decades’ results may simply show that, over almost any time period, stocks are more likely to go up than down. At best, theories like these are harmless diversion. At worst, they distract from a more rigorous analysis. End of sermon.
Other than 2008, the two worst years since 1950 are 1991, when the S&P 500 fell 4.6% in the first five days, and 1978, when it dropped 4.7%. But in 1978, stocks ended the year up just 1.1%, while in 1991, stocks skyrocketed 26.3%.
What will be our fate this year? I’ll be closely watching (along with everyone else) the housing market, the credit crisis and especially the U.S. economy. But with so much uncertainty out there, we’ll probably have to wait another 358 days before we’re sure how this year turns out.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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