According to the work of Jay Kaeppel, a US market historian, the first five trading days of the year can tell us a lot about the outlook. His study of the 1937-2007 period found that if the Dow Jones Industrials went up over those sessions, the odds of a positive return for the rest of the year were greater than four-fifths. Negative Januaries were less portentous but did lead to lower gains overall.
Rocky start for Dow
The Dow ended 2013 at 16576.7 and has since had a rocky start to 2014. It suffered a big down-day to open the New Year and then yet more selling on Monday 6 January. Thanks to its comeback on Tuesday 7, however, the index is within easy reach of its levels at the end of last year. But I wouldn’t read too much into a lower first week, if that is what happens.
FTSE pauses for breath
The overall tendency in the main developed-market equity indices is still plainly upwards. The selling in the past few days has not done any technical damage whatsoever. In the FTSE 100, the motion has been largely sideways. This is the classic behaviour of a market catching its breath after a strong move higher. The natural resolution to this would be yet another move to the upside.
Sizzling mid-caps
More importantly, there are clear signs of bullish life in more risky indices. The mid-cap FTSE 250 has had a storming start to 2014, with three up days out of four. Likewise, the technology-laden Nasdaq 100 gave a repeat buy-signal on its swing-chart on Tuesday 7. This says to me that investors are still in the mood to ride the uptrend. I expect to see both these indices at yet new fresh highs before long.
Nifty Nikkei
Japan’s Nikkei 225 is an especially inviting prospect at the moment, as I see it. The index finally overcame its May 2013 bull highs on Christmas Eve. The subsequent pullback is totally healthy, helping to bring its daily relative strength index (RSI) down from a slightly overbought 71 per cent to around neutral. Pullbacks to the 21-day exponential moving average (EMA) like this have yielded several great buying entries to this index.
Not everyone is convinced by the bull case, of course. The snapshots of spread-bettor positioning I’ve seen this week points to widespread scepticism towards the indices. Just under two-thirds are short of the Dow at the time of writing, with around half short of the DAX. In my experience, such negativity after a small retreat in the markets makes a great buying opportunity.
All being well, the bull market in US equities will celebrate its fifth anniversary in March. Few uptrends have lasted as long as this, according to my research. However, the handful that have entered a sixth year have all produced very respectable returns. I explore whether there really is any comparison between those episodes and today in a newly published Market Tactics report, which you can read here: bit.ly/1cOMXE4.
