Is Timing As Important On Wall Street As It Is In Life? (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Before we get into this blog, I must apologize for a mistake in the last one.  I erroneously mentioned the Russell 5000 Index.  It is actually the Russell 2000 Index.  I confused it with the Wilshire 5000 Index.  Sorry for that.  Now we will wrap up the topic of market timing.

The American author Mark Twain is best known for his many books and essays on life as he saw it.  He also had some ideas about the stock market.  Here is one of his observations on investing:

October.  This is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May, March, June, December, August and February.*

As I have said in the past, if you look long and hard enough, you will find some degree of correlation between all sorts of essentially unrelated events.  Based on a study for the years between 1949 and 1975, some analysts feel that there is a connection between the behavior of the market in January and the rest of that year.  The old saying is, "As January goes, so goes the year."  Interestingly, in the years prior to 1949, January's action was accurately predictive only 50% of the time, equivalent to a coin toss.  I suspect the study's time period stopped in 1975 for the same reason.

Some believe that politics may have an effect on the markets.  Several studies over the years have concluded that Wall Street has greater gains under Democratic presidents than under Republicans.  In a recent article in the Wall Street Journal, it was reported that the Dow Jones Industrial Average has recorded a 7.8% yearly gain under Democratic presidents and only a 3% gain per year under Republicans since 1900.  A 9.6% average annual gain was reported during the terms of every Democratic president faced with a Republican Congress.

Two of the more lighthearted market timing predictors are the Super Bowl Effect and the Hemline Index.  The belief regarding the Super Bowl Effect is that if an NFL team wins the Super Bowl, the market will do well that year.  If an AFL team wins, the market is in for a decline.  I must assume someone with a lot of time to waste discovered this relationship.  The Hemline Index stands for the proposition that the length of women's dresses and skirts is an indicator of the market.  If the skirts are rising, so too will the market.  Conversely, if skirts are lengthening and heading to the ankles, a market decline is in the offing.  Not to put too fine a point on this one, but there is a limit as to how high a woman's skirt can rise, i.e., how short it can be and still be worn in public and probably the same holds true for the market.  Like dresses, markets can not rise forever.  At best, you might be able to say that the hemlines rise during good times when people are happy, optimistic and eager to invest.  They drop when the mood of the people becomes somber (because markets are declining?).  I would strongly advise against betting your life savings on either of these indices.

Norman G. Fosback, in his book Stock Market Logic, A Sophisticated Approach to Profits on Wall Street, probably summed up timing and cycles best when he wrote: 

Most cycles are without doubt figments of the imagination.  Nevertheless, strange things exist in the universe, and the ultimate resolution of the truth of cyclic phenomena must await further study.  In the meantime, if cycles have a utility, it is in reminding us that "This, too, shall pass;" that no bull market or bear market lasts forever. **

I will end this blog on timing the way I started it; with another quote from Mark Twain:

There are two times in a man's life when he should not speculate: when he can't afford it, and when he can.***

 We will look at the other offspring of technical analysis, momentum trading, in the next blog.

* Excerpt from Pudd'nhead Wilson, Mark Twain, 1894

** Excerpt from Stock Market Logic, A Sophisticated Approach to Profits on Wall Street, Norman G. Fosback, copyright 1976, 1993, The Institute for Econometric Research, page 168

*** Excerpt from Following the Equator, Mark Twain, 1897

Comments are always welcome.