Tuesday, November 13, 2007

Stock Trading Strategies Based On Historical Patterns

Can You Get Rich With These 7 Stock Market Oddball Indicators by Silicon Valley Blogger is a nice post on stock market timing strategies based on historical patterns or events such as the Super Bowl winner, month of the year, or hemlines to predict future market performance. While I consider many of the indicators are purely coincidental (e.g. hemlines, Super Bowl winner, and Chinese numerology), there are a couple that I think are relatively good indicators of short term trends.

Presidential term cycles - This indicator shows that the third and fourth year of a Presidential term are the higher return years, on average, for the stock market, with the third year (in this case 2007) being the best. I have seen data through 2003 that shows average returns of 7.5%, 8.1%, 18.5% and 13.7% for the first through fourth years, respectively. Of course, any one year can vary from the average and there is no intrinsic reason the third year will be the best.

Year end effect - This strategy capitalizes on tax loss selling that occurs during the final months (October to December) of a calendar year. Stocks with losses will be pushed lower in the short term by sales, sometimes leading to a rebound in January of the following year. The risky part is that one is typically buying a stock that is down from its peak of the year. There are times when the stock will go much lower.

While neither of these timing strategies are sure wins, I have been incorporating them into my purchase activities for 2007, combined with a modified Unemotional Investor Growth system. I also plan to utilize these Presidential Term and Year End strategies into 2008.

Lately, I've noticed a new indicator related to my financial advisor:-) My advisor, coincidentally, was on vacation during the August, 2007 correction and during the part of market decline in early November, 2007. I have mentioned the correlation to my advisor and have asked him not to take any more vacation for the next forty years :-)

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This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

2 comments:

The Saving Freak said...

I think you are onto something with your financial advisor. Maybe he is avoiding the bad times so he doesn't get any angry phone calls. As far as presidential elections go that is an awesome theory that I have heard many people try to explain. In looking at the election if it appears evident that the democrats will win the house, senate, and white house I expect there to be a massive sell off in anticipation of new taxes (or old taxes that will be brought back). I am not saying their policies are good or bad but that taxation causes people to change their behavior.

Super Saver said...

Thanks for your comment.

For my financial advisor, I apologize for creating an impression that he was avoiding clients during down market days. (For the record, he is usually accessible in the same day I call, whatever the market performance.) I was, jokingly, commenting that market declines coincidentally correlated with his vacation plans and that he should stop taking vacation to prevent further market declines:-) I've revised to post slightly to better reflect the humorous intent.

Good point of party changes as a possible cause for the Presidential election cycle phenomenon. Uncertainty can have a negative impact on market returns.