The Best 3 Months for Stocks

11/30/2011 9:30 am EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Stock Trader’s Almanac editor-in-chief Jeffrey Hirsch cites historical data indicating that the stock market’s strong performance in October is likely to give rise to a three-month period of strength lasting through January.

Jeffrey Hirsch joins me, and Jeffrey, you are an historian of the markets, editor-in-chief of The Stock Trader’s Almanac, Commodity Trader’s Almanac, and lots of other things, too. 

Let’s talk about rearview-mirror action. October was phenomenal, but we’ve had tough times in November.

Well, for a couple of days there, we looked like we were going to have the best October ever. We had a little selloff at the end, but it still was ranked number four since 1950 and about number five since way back.

But we took the top 20 Octobers since 1950 and found that of these 20, 17 of them had gains over the next three months.

There is that November, December, and January as the best three consecutive months, and what we found is the average gain of all of them was 6%, and only the three losses that we had were related to Vietnam in 1969 and 1970, the undecided election in 2000, and the buildup to the Iraq war in 2002 and 2003. 

So, a good October is a good omen for the best three months. I know we’ve got some headline risk right now, but we seem to be holding the new support level, which was the old resistance of about 11,700, 11,600 on the Dow, so that’s encouraging, but there is risk here. 

We have some exogenous things impacting the market other than the normal seasonal trends, but good Octobers usually mean a strong three months following.   

And so we should see a Santa Claus rally or something coming in?

Well the Santa Claus rally is the last five days of the year. I know a lot of people say any year-end rally is a Santa Claus rally. That’s not the official Santa Claus rally that we have.

We usually see about a 1.5% gain in the S&P during that seven-day period—the last five days of the old year and the first two of the new year—but when that doesn’t happen, that’s a negative signal. 

We say if Santa Claus should fail to call, bears may come to a broad wall. That worked well for us in 2000 and also 2008.

So it’s usually a bullish time, but when it doesn’t appear, when it doesn’t materialize, it’s the first early warning of a potential negative year. 

If you look at history, have we had any type of problems that we’re seeing now with the sovereign debt and the headline risk; have we seen that play over again?

We have. I find the “financial crisis” mode that we’re in now is very similar to the turn of the last century where we had the banker’s panic in ’07, we had the rich man’s panic in ’03. There was a lot of financial strife going on at the turn of the last century. It seems to be similar to what we’re seeing now. 

Nothing is ever exactly the same. We’ve got similarities to the ‘70’s, but we had the big inflation back then.  Now we’re in a low inflationary period.

Sort of a similar crash to 1929 of the Depression; not quite as big, but the second-biggest decline that we had ending in ’09, so there are similarities to a lot of the different previous secular bear periods that I still think we’re in.

And how about the similarities to the gilded age of that period?

Well, I don’t think we’re there yet. That’s coming. I think we’ve got a couple of election cycles before we work through all of the excess and the difficulties.

The political system is dysfunctioning around the world, a lot of it in the States, but Europe is having its issues, so I don’t think we’re going to break out of this secular bear range for another five or so years—maybe 2017, 2018—after we get some new policies in there, and we get the inflation that is starting to heat up to level off again.

There is this youth movement out there, the Occupy movement is starting to gather momentum, but what it’s showing me is that there is that animal spirit brewing in the young people, and those people are going to develop the next enabling technology that is going to shoot us into the next Super Boom. 

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