Wednesday, April 16, 2008

The First Four Trading Days of 2008

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In the January 2008 meeting of the New York Investing meetup an analysis of the first four trading days of the year was done (to see the video for this talk please go to : Numerous research studies have shown that what happens in the market during this time gives a good indication of the direction of the market for the year as a whole. The reason this indicator works is that major reallocations of investments are made in the beginning of the year, so drops or gains indicate what sectors of the market people are taking money out of and what sectors they are putting money into.

Things didn't look good for U.S. stock market performance in 2008 based on this indicator. The Dow Jones had the second biggest drop (percentage wise) ever on the first trading day. The only bigger drop was in 1932, in the depths of the Great Depression. The Japanese market performed even worse than the American market, having the largest first day drop ever. The Dow didn't just fall the first day, but was down significantly for the first four trading days. The same was the case for the S&P 500, the Nasdaq, and the Russell 2000. The signal was clearly and strongly negative for U.S. stocks.

While stocks looked like they would be falling for the year and the classic bear market trading patterns were forming (the 200-day moving average moving down and the 50-day moving average trading below it) for them, some commodities were looking very bullish. Examination of the trading of the gold, silver and oil ETFs indicated an almost mirror image pattern of the trading in U.S. stocks. GLD, SLV and USO went up during the first four trading days, indicating gains for the year.

The less than invisible hand of the Federal Reserve was noted in early year stock trading as well. On the third trading day, U.S. stocks were having a big sell off and as it had done many times previously, the Fed made an announcement of a new liquidity injection in order to turn the market around. While such manipulation can work in the short-term, it was pointed out that this would eventually fail and not protect the market from further drops.

NEXT: Muriel Siebert Discusses the Credit Crisis

Daryl Montgomery
Organizer, New York Investing meetup

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1 comment:


More trading takes place all the time.