Events in December, January and February Foreshadow the Stock Market Direction

The direction of stock markets around the world are influenced by economic conditions, direction of interests rates, money supply, credit availability, financial news events and other intrinsic factors. However, certain uncanny events in December, January and February have forecasted and anticipated the direction of the stock market in the near future: Santa Clause Rally, January Effect, and the Super Bowl Indicator. These timely events have frequently and statistically proven the upside or downside direction for stock market investors.

Santa Clause Rally (December Effect 1) is phenomenon known to occur between Christmas and New Year's Day (Some traders on Wall Street extend the Santa Clause Rally to include the first two days after the New Year's Day. 3): Majority of stocks traded appreciate in value during this time. 2 "It is a well - known phenomenon, first discovered by Yale Hirsch, and published in his Stock Trader's Almanac." 3 Numerous anecdotal reasoning for the Santa Clause Rally: Optimistic prospects for financial gains for the next year, tax considerations (buy and selling), Christmas bonuses are invested in stocks, pessimists are away on vacation during this time, and anticipating the January effect. 2 Also, other reasons for the Santa Clause Rally, financial institutions and mutual funds seeking to be fully invested for the new year, investors that fund IRA's and 401(k) retirement accounts tend to invest their money before the beginning of the new year, and those forecasting a good stock market rally in January influence people to invest money in the stock market in late December. Since 2005, Santa Clause Rally occurred sixty-five percent of the time, despite the bear markets in 2000 - 2003, stocks rallied in the final days of December. 3 Reflection of past Santa Clause rallies should be considered cautiously regarding future outcomes: Optimistically the new President Elect Obama will provide a strong stimulus program in 2009 that will rejuvenate the United States economy besides Treasury infusion of capital in the financial markets from the $700 million rescue fund, however in the short term no current signs of an economic recovery is for-shadowed. 4

January Effect (turn-of-the-year-effect / January anomaly 9) theorizes if the first five stock market trading days of the New Year is up, end of the year the stock market will close higher. 14 In the 1980's, Don Keim first discovered the January Effect. 6 Reported in January 12, 2006: "In fact, according to the Stock Traders Almanac, 30 out of the last 35 years this rule has proven true (Dow Jones and Nasdaq stock markets)". 5 According to historical data, from 1900 - 2005 the January Effect has proven to be accurate seventy percent of the time. However, during the years 2001, 2002, 2003 and 2005 the January Effect was disproved. 7 "As history suggests, the markets average nearly 14% gains when the January Effect is triggered." However, Yale Hirsch suggests, since 1950, every stock price depreciation in the S & P 500 preceded a new or extended bear market or flat stock market price swing. A down January stock market averages thirteen percent decline in valuation per year. 11

Factors that influence the January Effect include investors (and fund managers) who had sold shares before the end of the previous year for tax purposes (capital gains and losses taken) are compelled to repurchases those shares in the beginning of the new year or reinvest their money in new stock investments. 6 Contrarily tax - sheltered retirement plans have no tax advantages for selling shares at the end of the year. 8 Also, according to the January Effect small priced stocks tend to perform better in January than larger priced stocks. 7 As well, economic, fundamental and technical developments have influenced the January Effect results both on the upside and downside. 5 According to Robert Haugen (Professor at the University of California, Irvine and author of numerous books) and Philippe Jorion (Professor of Finance - The Paul Merage School of Business and author of numerous books): "The January effect is, perhaps the best-known example of anomalous behavior in security markets throughout the world." 10

A phenomenon that predicts the outcome of the stock market by the end of the year and has no rationality is called the Super Bowl Indicator: According to belief when an old National Foot Ball League (NFC division) team wins the Super Bowl the stock market will be up for the year. Contrarily, when a old AFL (AFC - American Football Conference division) team wins the Super Bowl foretells a decline in the stock market for the year. According to historical records, the Super Bowl Indicator has proven to be about eighty-five percent accurate as a prognosticator, despite some who may claim this to be purely a coincidence. 12 However, the Super Bowl Indictor has been proven wrong, number of occasions: In 1998 and 1999, the Bronco's an original AFL team won both years and the stock market rallied strongly, and in the year 2000, Rams (original NFL team) won the Super Bowl but yet the stock market ended that year down, first time since the year 1990. 13

Keep in mind or taken with a grain of salt, past performance and phenomenon's are not always indicative of future events.

References:

1.) Santa Claus rally - http://en.wikipedia.org/wiki/Santa_Claus_rally

2.) Santa Claus Rally - http://www.investopedia.com/terms/s/santaclauseffect.asp

3.) Santa Claus Rally - http://www.investmentu.com/IUEL/2005/20051128.html

4.) Is Santa Claus Getting Set to Cheer UP Wall Street? - http://biz.yahoo.com/cnbc/081217/28194983.html?.v=1

5.) VCRPG's Investment Policy Committee Notes - http://www.imakenews.com/vcrpg1/e_article000513485.cfm?x=b11,0,w

6.) January effect - http://en.wikipedia.org/wiki/January_effect

7.) January Effect - http://www.investmentu.com/IUEL/2005/20051229.html

8.) January effect - http://www.answers.com/topic/january-effect

9.) January Effect - http://calendar-effects.behaviouralfinance.net/january-effect/

10.) January Effect - http://www.investorhome.com/anomcal.htm

11.) What is the January Effect? - http://www.mysmp.com/stocks/january-effect.html

12.) Super Bowl Indicator - http://www.investopedia.com/terms/s/superbowlindicator.asp

13.) Lowrisk.com - http://www.lowrisk.com/superbowl.htm

14.) A Look at the First Five Days of the Month Indicator and the January Effect - http://www.safehaven.com/article-2421.htm