A Bullish Start To 2012

By Tim Parker | January 02, 2012 AAA

Santa Claus isn't done with his rally just yet. On the first trading day of 2012, the bulls showed up. The Dow Jones Industrial Average was up 179 points and the S&P 500 was up 19 points, marking an optimistic first day of trading. If you're a technical trader, you know that if the market rallied well above a key level, that is a signal to investors that the market may continue to rise, at least in the short term.

But money isn't made on days or weeks, it's made over months or years and although January is off to a strong start, what does that tell us about the rest of year – or does it tell us anything at all?

TUTORIAL: Economics Indicators

Recent History
We're all filled with optimism in the month of January. Out with the old and in with the new, as they say, and that is true of investors as well. The financial media continues to publish articles telling investors that this year may be the year that sees a true economic recovery, although very little has changed in the global landscape.

Investors are also filled with New Year's euphoria, and if we look at just the past three years, there's reason for the optimism. In 2009, the first trading day of the year saw gains in the S&P 500 of 3.16% and went on to add 19.67% in the days following. In 2010, the S&P was 1.6% to the upside on the first trading day and by the time the year ended, it was up 11%. This past year we saw a 1.13% gain on day one but ended the year with a loss of 0.7% from the second trading day of the year until the last.

The Past 25 Years
Three years do not necessarily make a trend, so Bespoke Investment Group looked at returns over a 25-year period. They found that the market had an average first day positive return of 0.42% with returns in the green 48% of the time. We've also seen high volatility over the past quarter century. The market has been up more than 1% for 13 of the past 25 years, with 1988 being the biggest first day move at 3.59%.

Does where we start have any statistical effect on where we end? Not really, according to Bespoke. The S&P 500 has seen gains in only half of the past 25 years, but by the end of the year averaged a return of 7.9%.

Although markets were up only half of the time on the first day, they went up for the year nearly 75% of the time; in only 12 of those 25 years did an up first day lead to an up year, or a down first day lead to a down year. Bespoke indicates that when the first trading day is positive, the rest of the year is positive 75% of the time. When it's negative, the market is positive 69% of the time. (For more, read 4 Ways To Predict Market Performance.)

The Bottom Line
Investors are always looking for an edge and analyzing statistics like these can sometimes provide results that allow traders to make data-driven trades, but sometimes statistics show little or no correlation. In the case of the first trading day of the year, these statistics show that no investment decision should be made based on bullish returns on day one. Don't be fooled. All of the same market headwinds followed us into 2012 and as we learned in 2011, market sentiment can turn based on the smallest of events. (For statistics to use for analyzing market movements, check out Leading Economic Indicators Predict Market Trends.)

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