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"StockBreakthroughs Newsletter"
January 23 , 2006.
In this issue...
Will the Stock Market in 2006 be as calm as 2005 ?
2006 started off pretty well with the Dow Jones climbing above 11.000 for the first time in four and a half years when it reached 11.005,98 points during the trading session on Jan 6. The close for the day
was 10.959,31 points.
The best day so far this year was on Jan 11, when the DOW reached 11.099,15 during the day closing at 11.043,44.
But for most of last year, the stock market veritably resembled a sleeping tablet.
It might not have felt that way if you were unlucky enough to have been invested in General Motors, whose stock fell by some 50% for the year, or fortunate enough to have been invested in Google,whose stock more than doubled. But the overall market experienced one of its least volatile years ever, if you go by the spread between the closing high and low for the yearof the Dow Jones Industrials Average.
The closing high for 2005 came on March 4, when the DJIA finished the day at 10,940.55. The Average's closing low came on April 20 at 10,012.36. That difference of 928.19 points is equal to 9.3% of the year's closing low.
There has been only one other calendar year since the DJIA was created in 1896 that had a lower percentage spread between high and low. That was 1992, in which the spread was just 8.8%. In fact, last year's reading was less than a third of the historical average of 34.6%.
Last year's tranquility came as a surprise to many advisers. A year ago, many of them believed that 2004's serenity was the calm before the storm.
But advisers should not have been surprised. There is no evidence in the historical record to support the notion that calm years are likely to be followed by periods of very high volatility. In fact, there is some evidence supporting just the contrary - that calm years are more likely than not to be followed by calm years and volatile years are more likely than not to be followed by volatile years.
To some extent the future is like the past, therefore, there is an above average chance that 2006 will also be a calm year.
But still, this historical data tells us nothing about whether the market is more likely to rise or fall in 2006. Are there other patterns in the volatility data that tell us which direction the market is likely to take this year?
Some of the investment newsletters I monitor believe that the answer is "yes," and that last year's calm is a positive omen. In this regard, they point to the old Wall Street axiom, "Never Sell A Dull Market Short."
However, I don't find any support for this in the historical data. Since 1896, when the DJIA was created, there has been no statistically significant relationship between the DJIA's gain in a given year and the previous year's spread between the market's high and low.
And to the extent that the historical data allows a guess, it points to a relationship that runs contrary to the one assumed by the "Never Sell A Dull Market Short" crowd: The market actually is more likely to turn into a great year following years of high volatility than following years of calm.
Wrapping it up:
When basing a forecast for 2006 on the historical data on market volatility, the best bet is for another year of relatively quiet market action, which does not mean that there is no money to be made.
In every market situation there's always the one or other equity that's worth investing in. There will always be the one or other stock that will stand out to the rest.
Yours in Successful Trading,
Ricky Schmidt
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StockBreakthroughs.com > Will the Stock Market in 2006 be as calm as 2005?