The 5-Day Rule
The indices had a great start to 2012, but the bulls have yet to capitalize on that momentum. After a big pop to kick-start the year the indices have floundered over the past several sessions. But I still remain optimistic the bulls will move the indices higher, especially if Alcoa can report good numbers tonight after the close.
Chairman of Goldman Sachs (NYSE:GS) Asset Management Jim O'Neill agrees with me, or at least he will be inclined to believe the stock market will move higher in 2012 if the indices can stay positive today.
In his latest and greatest letter to Goldman Sachs clients Jim discusses what he called the January 5-day rule:
"I first came across this notion from the Stock Market Almanac, and my 2012 edition has been more heavily turned over in the past couple of days than it normally would. It taught be two things many years ago. One, that there is remarkable pattern historically that many major stock markets show very strong performance from November through April, and quite often, quite weak performance from May through October (hence the `sell in May' oft discussed notion).
"Any investor that stuck to this calendar investing pattern would dramatically boost his returns. And two, when the S&P rises after the first 5 trading days of a new year, the market has a pretty good annual performance. In fact, the Almanac claims the success rate has been just under 87% since 1950. Jose studied a broader 5-day rule as well as the `January month' rule in his daily and showed that, for a number of markets, the January factors seemed to be quite powerful, albeit less than I had believed, and not enough to dismiss the superior importance of fundamental analysis."
The 5-day rule doesn't apply if the indices head lower. And 2011 was the sixth time that the rule didn't work despite a positive start.
The bulls have an excellent chance to hold their gains today too. The indices in Asia were mostly higher following Chinese rumors that easing will come (soon) to support the stock market. Chinese stocks have been dogs for the past few years, but those stocks can be powerful trading tools in the short term.
In addition to the positive news from Asia, the market is unlikely to have a big move ahead of earnings from Alcoa (NYSE:AA) tonight - investors will likely wait until earnings are announced. I also think investors will focus more on JPMorgan (NYSE:JPM) earnings this Friday as opposed to earnings from the aluminum producer tonight.
