Investing by the book has paid off in 2011

If market adages continue to prove true, perhaps a Santa Claus rally is in store for December.

By TheStreet Staff Nov 15, 2011 1:18PM

the streetBy Jeff Kleintop, TheStreet


It has been a textbook year. That is, if your textbook is the Stock Trader's Almanac. The old stock market chestnut "sell in May and go away" proved to be good advice this year. But that was not the only adage of Wall Street traders that worked in 2011 -- they all worked.


This has been the year of the stock market cliché in that all of the time-worn axioms based on the calendar actually were worth following this year:


The "January effect" -- the market tends to rise in January, attributed to individual investors putting money to work after taking tax losses in December -- worked this year as the S&P 500 ($INX) posted a 2.3% gain.


The "January barometer" -- stock gains in January often lead to a gain for the year -- and the overlapping "first five days" indicator -- stocks rising during the first five days of the year indicate a high probability of a gain for the year -- have both proved accurate so far.


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"Sell in May and go away" -- suggests investors sell and avoid summer -- worked, with stocks peaking for the year on April 29.


October, the "bear killer" month -- stock market downturns famously end and reverse in -- ended the 19% peak-to-trough stock market decline, with stocks bottoming for the year on Oct. 3.


If this "year of the market axiom" pattern continues, what comes next? Perhaps a Santa Claus rally is in store for December. Markets must still move past the uncertainty of a November that includes key policy events:

  • Government transitions in Europe
  • Action by Congress to avoid a government shutdown 
  • The supercommittee's proposals to find $1.5 trillion in deficit reduction measures

But then a year-end Santa Claus rally may cap off a volatile year of modest single-digit returns. What may be the trigger for such a textbook year-end rise in the market? 

  • Investor sentiment rebounds as Europe takes long-overdue actions to avoid a financial crisis.
  • The job market improves, as foreshadowed by the recent decline in initial jobless claims below 400,000 in recent weeks.
  • The holiday shopping season surprises markets by exceeding retail sales estimates, as it did last year.

This textbook pattern of calendar-driven performance by the stock market may mean that the best year-end strategy is to invest by the book.


Nov 15, 2011 5:29PM
Investing by the book? Using absurd timing strategies to forecast returns is neither investing by the book nor investing with any sense. The "book" on investing is emphasized with long-term, globally diversified, and low cost passive strategies. Investing by the book?
Nov 15, 2011 8:30PM

It is hard for the average person to find valid long term computer studies,  you can't trust what people say, let's see the program and results for 80 to a 100 years or more. People talk, but I never see the results of computer studies . Many have been done by corporations and people,  if they work no one is talking.  Have seen one 80 year study that was 3% better than buy and hold.   Who has all the computers that are doing the trading?  What are their results?  Talk is cheap, lets see some facts.   Computers can deal in facts if programmed for the truth,  computers can also distort the truth if programmed to give a false picture of things.     He who knows is not talking. 

Nov 15, 2011 9:07PM
The "book" on investing is emphasized with long-term, globally diversified, and low cost passive strategies
Smile That's cheap, generalized  rhetoric that you'll find on investor web sites and magazines. Every individual market sector (retail, tech, utility, etc.) and investment (bond, commodity, equity, ETF,  mutual fund, etc.) has a response and rhythm that correlates with the overall market and sectors. The average person most likely has to depend on informed advisors by buying ETFs and mutual funds. only fairly experience and seasoned investors ca pick individual equities and beat the averages and indexes.  Computers that do the trading are owned by companies like hedge and mutual funds that can afford the development and software costs. You can get the recommendations of such firms by opening accounts at them. Some will even actively manage your investments for a fee,
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