Jeffrey Hirsch, Editor in Chief, Stock Trader’s Almanac, takes a look at 2013 and the year’s seasonal cycles.
John Nyaradi: Hi, everyone I’m John Nyaradi, Publisher of Wall Street Sector Selector, a financial media site specializing exchange traded funds and global markets. Please welcome our special guest, Jeffrey Hirsch, Editor of Stock Trader’s Almanac. Jeff welcome to Wall Street Sector Selector.
Jeffrey Hirsch: Great to be with you again John.
John Nyaradi: Thanks, Jeff. I always enjoy talking with you and am looking forward to our discussion today. Jeff’s the Editor In Chief of Stock Trader’s Almanac. He’s a frequent guest on CNBC, Fox, Bloomberg and other major media outlets and is the author of a new book, The Little Book of Stock Market Cycles. Jeff, lets start with a quick review of 2012 and what do you see ahead for 2013?
Jeffrey Hirsch: I think our forecast was close to what we’ve encountered this year. We were looking for a top in the 13,000-13,500 area on the Dow (NYSEARCA:DIA) during the first half, and we got that. Then we expected some weakness. Things didn’t get as soft as we thought prior to the election period but we had the correction. Our forecast of a 5% to 10% gain on the Dow (NYSEARCA:DIA) for the year which we made back in December, 2011, looks like it will be quite accurate.
We’re concerned looking ahead to 2013. It’s the post election year, worst year of the four year cycle. The first quarter of the post election year is the worst quarter of the four year cycle of all 16 quarters and we’re going to be looking closely at several seasonal indicators coming towards the end of the year.
We’ll be looking to see if we get any sort of a small cap rally in January; that usually starts at the end of December. We’ll be looking for the Santa Claus Rally. The Santa Claus Rally was discovered by my mentor, father and creator of the Stock Trader’s Almanac, Yale Hirsch, in 1972, which looks at the last five trading days of the year and the first two of the New Year and that 7 day period averages a 1.5% gain on the S&P 500 (NYSEARCA:SPY) since 1950.
Not the most exciting move to trade but everyone wants to know whether or not the Santa Claus rally is going to appear. The important thing is whether it appears or not. The saying we have in the Stock Trader’s Almanac that Yale coined is, “If Santa fails to call, the bears may come to Broad and Wall.”
What this means is that if we don’t get that bullish move around the end of the year and beginning of the New Year, it’s a bad sign. It’s an omen that things are not so bullish for the New Year.
We’ve seen that the last four times that the Santa Claus Rally did not appear. We had flat years in ’04 and ’05, and in 2000 and 2008 we had some pretty serious declines and nasty bear markets.
We’re putting together our forecast for next year and we are concerned. There’s a lot of trouble overseas. I’m not sure how we can rally and how the U.S economy can boom when there is slowing in Asia and Europe, so we’re looking cautiously towards 2013.
Best-case scenario probably is a flat year; bad case, things unravel and we start to go South.
John Nyaradi: One of your main indicators this time of year is the January Barometer and I just read your article about how that operates in secular bear markets. Can you tell us about that?
Jeffrey Hirsch: Well, the January Barometer basically says that as January goes for the S&P 500, (NYSEARCA:SPY) so goes the year. Since 1950 there have been 7 major errors and all of those errors occurred during secular bear markets.
I think the over arching pressure and sideways to down direction of the markets during secular bear markets makes the January Barometer a little bit harder to read but it still has a pretty impressive batting average, about 88.5%.
Down Januaries have a remarkable record. Every single down January since 1950 has been followed by either a continuing bear market, a new bear market or a 10% correction. It’s a sign that something is not going well for the market and economy. So we’ll be looking at that in conjunction with the Santa Claus Rally mentioned earlier and also the first five days of the year.
In addition, with the fiscal cliff discussion, we’re either going over the cliff where we’ve got higher taxes or they make a deal that we get some higher taxes and some spending cuts, so one way or another, spending’s going down, taxes are going up and that’s gonna pressure the market the short term.
John Nyaradi: We were just talking a minute ago about your new project, you’re going to be chief strategist for a new fund. Tell us about that.
Jeffrey Hirsch: I’ve teamed up with Jordan Kimmel who’s a gentleman I’ve known for about 15 years now and he has an exemplary model, a magnet stock selection process which uses 19 different criteria. It’s a blend of value growth and momentum to select stocks that are performing well and have continued to perform well. And it averages about 23% a year and we’re going to be managing funds with myself as chief market strategist with a fund we call Magnet AE, the AE for Almanac Enhanced.
Using Jordan’s stock selection system overlaid with our Stock Trader’s Almanac timing signals, seasonal strategies and cycles, if we get a very bullish reading like we had in October, 2011, we’d open up the throttle and go very long with the top ranking magnet stocks and when we get a sell signal, a seasonal sell signal, like in April, 2012, we put the brakes on and take defensive strategies.
John Nyaradi: We’re talking here at the end of December. For retail investors, what should we be watching for? What’s at the top of your mind right now as we head towards the end of the year and 2013?
Jeffrey Hirsch: The year end exit concept is at the top of my mind. During the last secular bear market we spoke about from ’66 to ’82 there were 4 election year, year end exits.
The actual high of the bull market may have occurred a couple months prior or a couple months after, but if you look back at ’68 ’72 ’76 and ’80, the December closing price of the S&P 500 (NYSEARCA:SPY) was pretty close to the high end of the bull market.
In ’68 the high was actually in December and then we had a bear market that took us down to the low in May of 1970. In ’72 the high was actually January, ’73 and then the big bear market that took us down to the bottom at ’74. ’76 the high was September. In 1980 we had a high in April of ’81 but December of ’80 was pretty close to that and then we had the final bear market of that last secular bear that ended in August, 1982.
So that’s the thing that I’m looking at going forward. We have a 15 year projection based on our super boom forecast which is for flat to down and tepid market behavior for the next several years so we can clean up the dysfunction in Washington, get rid of the hangover from the crisis and all the debt and asset bubbles and begin a new, another economic boom and another secular bull market which I don’t suspect will begin until 2017 or 2018.
Between 2013 and then, I’m looking for a test and perhaps a breach of Dow 10,000 again. I put this forecast out in April of 2011. I’m concerned that we’ll continue to track this projection based upon the history of seasonality and cycles.
John Nyaradi: Folks, we’ve talking with Jeffrey Hirsch, Editor In Chief of Stock Trader’s Almanac. You can learn more about Jeff’s work just by following the link at the bottom of this interview. Lots of exciting things going on here. He has his Almanac and newsletter and now his new fund. Jeff, wonderful chatting with you today, as always. I know we’re all looking forward to talking with you again really soon.
Jeffrey Hirsch: Thanks, John. All the best in 2013.
(recorded interview, edited for length and clarity)