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OPINION

Best foot forward

Best foot forward
January 3, 2013
Best foot forward

Despite the lack of volume that typically accompanies the first five trading days of each year, there is evidence that the price-action during this period may have longer-term implications. Jay Kaeppel - an expert in seasonal trading - has shown that over time, a gain in the Dow in the first five sessions of January has usually been followed by a positive annual return. In a study going back to the 1930s, Mr Kaeppel calculated that the probability of an up-year after an initial up-week is 80 per cent.

This tendency worked well enough once again in 2012. The Dow notched up a gain of 1.4 per cent in the first five sessions of last year. It then went on to record an increase of 7.3 per cent for 2012 as a whole, and was up by as much as 11.8 per cent at its best point back in October. So, it will be worth watching closely to see what happens in the first few days of 2013. A gain would reinforce my call for further upside as the year progresses, and for the Dow to hit a new record high above 14198.

Bah humbug for Dow

But what of the lack of a 'Santa Claus' rally in the final days of 2012? Having peaked at 13336 on 18 December, the Dow sold off down to an intraday low 12884 on New Year's Eve, before closing strongly above 13100. Wall Street remains in a primary downtrend, according to the venerable Dow Theory, following the sell-signal generated back in early November. The bears will doubtless interpret the absence of a festive bounce as further evidence that a major top is in.

The wobbles on Wall Street are, I believe, primarily to do with the still-unresolved budgetary standoff between America's politicians. The US would almost inevitably suffer a recession if the two sides did not reach a compromise. A needless recession in the world’s largest economy would very likely trigger a more serious pull-back in stocks on Wall Street and elsewhere. I continue to think that common sense will prevail, though, and that a deal will be struck.

FTSE still afloat

I am heartened that the European indices are holding up pretty well under the circumstances. Our own FTSE 100 made a fresh and only very-narrowly unsuccessful assault on the 6000 level on Thursday 27 December and has since sold off without much menace. The FTSE 250 looks even more robust. Having lately made a new all-time high, the mid-cap index has done little more than grind sideways for five sessions.

Robust mid-caps

DAX unwinds gently

Germany's DAX has also done the sideways shuffle in recent days. This pause is a necessary development, as I see it. The index had become fairly overbought, with a relative strength index of 74 per cent as of its fresh bull-market highs at 7683 on Wednesday 19 December. I reckon my first index trade of 2013 will be a long position.