Gauging Stock Market Performance
There’s a saying on Wall Street that however the Dow Jones Industrial Average index behaves in January, so goes the rest of the year. To measure the Dow’s performance in January, subtract its average on the first trading day of the year from the average on the last trading day of January. If the difference is robust—more than 100 points—the Dow likely will perform well for the rest of the year; if the difference is anemic—20 or 50 points, say—then it’s anemia for the year; if it’s negative, so goes the rest of the year.
The Stock Trader’s Almanac, a popular forecaster of market trends, uses the first five trading sessions of the year as its “early warning system” and that system is flashing yellow. In the first five-day period of 2008, the Dow posted a mind-boggling 675.75-point drop, the worst ever start to a year in point terms and the worst percentage decline since the first five sessions of 1978. In a sign that investors are bracing for recession, the market’s few gainers so far were defensive stocks, those seen as resistant to economic contraction because their products remain in demand no matter what.
But stocks tend to rally when the economy experiences the kind of slowdown brought on by financial crises like the savings- and-loan debacle in the 1990s and the sub-prime collapse today. The rally won’t happen right away, but sometime into the year. Just remember this: stocks that have dropped more than 89 percent from their all-time highs are unlikely to reach those highs again. Only a handful of companies managed to recover and reach new highs. In those rare cases, almost always there was a complete overhaul or change in top management.