The old Wall Street chestnuts aren't working ... or are they? Several traders have inquired why the old Wall Street chestnuts don't seem to be working any more:
Have we entered some weird new universe? Is the Fed causing these signals to fail? (That's what a lot of traders think.)
Relax. It may be as simple as realizing that there are other signals that are equally important.
I consulted my old friend Jeffrey Hirsch of the Stock Trader's Almanac about the failure of these signals. He pointed out that history indicates that presidential election years can have an outsized influence on the market, and that when you layer in the presidential election signals, the markets are behaving in a fairly predictable manner:
How did he come to this conclusion? By combining the historical data for seasonal stock market patterns (sell in May, buy in November) with the four-year presidential cycle (first two years tend to be underperform, last two tend to outperform) then throwing in a seasonal buy and sell signal, you get the best returns.
This is what the recommendations look like:
Source: Stock Trader's Almanac
Tricky, eh? But Hirsch insists that the effects of a presidential election cycle are so profound that they have to be incorporated with the old chestnuts.
Oh, and what about, as goes January, so goes the year? Hirsch noted that the proper interpretation of this rule is that every down January on the S&P 500 since 1950, without exception, preceded either: 1) a new or extended bear market, 2) a flat market, or 3) a 10 percent correction.
Hirsch says that the January barometer did work with the correction that followed in January and February.