Use The Early Warning System For Clues On Stocks, Gold In 2015 - by Kira Brecht

Use The Early Warning System For Clues On Stocks, Gold In 2015

Friday January 02, 2015 10:13

The U.S. stock market knocked out another year of above-average gains —with the S&P 500 registering an 11.4 % return at the end of 2014. That follows a nearly 30% return in 2013 and a 13.4% gain in 2012.
But, guess what? This bull market is old. The current bull cycle in stocks began in March 2009, meaning this uptrend is nearly six years old, which is long by historical standards. Only two of the previous eleven bull markets since WWI have extended into a seventh year, according to research from S&P Capital IQ.  See Figure 1 below, a monthly chart of the S&P 500.

Also, the US equity market is simply overdue for a correction. Typically, a pullback is defined as a 5-10% pullback in stock prices, a correction is a 10-20% decline and a plunge of 20% or more signals a bear market. "The S&P 500 has gone 38 months without a decline of 10% or more, versus an average of 18 months since WWII (and a median of 12 months," according to an S&P Capital IQ research note.
With jitters about potential Fed tightening this year running rampant, the stock market is on edge and vulnerable to selling pressure.
What are some early warning clues on what 2015 might usher in for US stock market performance? The Stock Trader's Almanac, published by Wiley, outlines a handy historical and seasonal clue —looking at January's first five days, which they call an "early warning system" for stock market performance. Simply put, after the first five trading days of 2015 —look at see if the S&P 500 is higher or lower.
The Stock Trader's Almanac's early warning system has an impressive accuracy rate. The most recent 42 positive first five day returns preceded overall gains for the year 35 times, which equals an 85.4% accuracy rate, according to the Almanac.  Better than flipping a coin.
Why should gold traders care about this? Historically, gold has tended to benefit from major tops in the stock market. Now, it is much too early to call for a major top in the stock market yet. But, traditionally, when paper assets —such as stocks decline, investors tend to gravitate toward hard assets, such as commodities, which includes gold.
A generally inverse correlation has been seen between stocks and gold in recent years. Take a look at Figure 2 below. Stocks, shown in red have been rising, while gold prices shown in black have been falling.
Bottom line? For traders looking for early insights on the major trends for stocks and possibly gold in 2015 —the early warning system can offer some clues.