Why the Dow Could be Headed Lower

I read this fascinating study by Barclays Bank this morning on how the performance of the Dow in the month of January can set the tone for trading throughout the year. In the first month of 2009, the Dow Jones Industrial Average fell 12 percent. According to Barclay’s study, if there is negative equity market performance in the month of January, the odds of stocks ending the year low rises from 32 to 69 percent. This is based upon 74 years worth of data. Since currencies are taking their cue from equities, further weakness in the Dow could mean further strength for the low yielding US dollar and Japanese Yen.

I hope you find this chart just as interesting as I did.

Source: Barclays

Source: Barclays

[ad#minivan]

10 Comments

  1. well, it worked in 08. on jan 1, DJI was at 13,043. on Jan 31, it was at 12,650. a harbinger of the horrible year to come, I guess.

    what puzzles me is why this index has any effect on anything. only 30 stocks, and the weighting is such that only a few of those really matter. it’s price weighted instead of market cap weighted, so smaller companies on the list are more heavily weighted.

    it would be interesting to look at the S&P500 or even the wilshire index and measure the correlation to currencies.

    Reply
  2. As support for the markets are not the final result nor the arbiters for the entire economy, let me first cite an article published in TECHNICAL ANALYSIS over a year ago that applied a cycle analysis to our economic cycles beginning in 1900. The analysis proposed graphically a four-year down cycle which began approximate 1 year and 4 months ago (I write from memory). We now have about 2 years and 7 months remaining in the down-cycle until all sectors are in solid uptrends. We cannot change fundamental cycles. It appears that financial analysts approve firm-layoffs of 1000 to 10000 employees when the market is in an uptrend or in a not-serious downtrend. When layoffs and firm closures affect Lehman Brothers and Goldman Sachs, then panic and anger appear.

    From CNBC (where the entire and only point is when to re-enter the market, since so many “yuppies” hoped to profit from “EASY MONEY”) –

    With only marginal help coming, investment advisors aren’t advocating using the mortgage plan as a springboard to get back in the market.

    “It’s hard for me to find many financials that I like at this point, or too many individual stocks I like,” Widner says.

    Instead, Widner says he likes agency real estate investment trusts, or REITs, that invest in residential mortgages guaranteed by government-sponsored entities including Fannie and Freddie.

    Hager says the emotional impact from the mortgage proposal could spark modest increases in consumer spending, while Larson remains bearish on the market, recommending that clients either stay on the sidelines or use exchange-traded funds that capitalize on movements lower in the markets.
    ——————————————————————————————–

    The precise point is that a far more fundamental set of changes is affecting the markets, an important one of which is that more is involved in life than 3rd tier manipulations of credit so the “markets” can generate easy yields.

    The cultivator who purchased his land in the Great Depression along the sea bluffs in Montecito, after immigrating from the Philippines, and then cultivated the land for “truck” crops and flowers in accordance with the solid principles of sound cultivation did conform to the commandments given to us in the Laws of Nature and by Nature”s God, as Thomas Jefferson stated among our Founding Principles. Finally, after raising children and providing the family with a sound foundation for a prosperous life in these United States, these agronomists and founding fathers in their own rights sold those lands for the prices which they had attained over 3 and 4 decades at rational rates of increase. This process contrasts quite starkly with what happened in SoCal real estate and elsewhere over the past 2 decades, where wealth was built on false or insufficient comparative indicators which shared the illusions as a community – not of productive families of different ethnicities – but rather of fantasies fueled by greed. Underfunding our schools, refusing to build new roads, letting pipelines decay without maintenance as a direct result of what were once known as criminal enterprises but now called leveraged takeovers, the refusal to develop new energy sources (whatever the comparative costs) in solar, wind, and offshore oil and the substitution of high-cost imported oil – which left hundreds of thousands of tradespersons, engineers, abd business people not employed and without opportunity – these are amongst the reasons for our judgement at this time. And, despite scoffers or too true True Believers, for each of whom absolute adherence to their respective creeds is a requirement, the judgement comes at its time and according to nature’s laws – not at the time and place and with the content of the analysts.

    Reply
  3. Hi Kathy,
    Can you help me to understand why further weakness in Dow leads to further strength in Dollar? Theoretically, when stock market is weak, demand for the currency falls as investors exit.

    Reply
  4. if I may-
    normally, Jordan, you’d be correct, as a drop in the current acct balance (which includes capital investments in a country) normally weakens a currency.

    However-
    the US dollar enjoys a unique position in the world. It is the reserve currency. It is also backed (however badly) by the largest economy in the world, the US. For now, the USD is the risk aversion currency of choice, followed by the yen (because of high foreign reserves and 4th largest economy).

    when risk appetite is in, equities rise, as the risk takers move their money from safe havens to equities and other higher risk/higher return investments. As the risk currencies are sold off to pay for the equities, they fall due to the lower demand.

    when risk aversion rises, equities fall due to lower demand, and risk aversion currencies rise. This includes the $, and the yen. note the inverse relation of the Nikkei and the yen, as well as DJ30 and the $.

    NB it will be interesting to see how long the $ remains the reserve currency, given the weakness of the underlying fundamentals. it may be replaced altogether, or just supplanted by additional currencies (perhaps EUR)…

    Reply
  5. Paul,
    The $US is the world’s reserve currency because the US MARKET PLACE for goods and services is the the ONLY unregulated market in the world. If protectionist sentiments succeed in changing this fact then it will lose this standing!

    The EUR is a great currency to travel with in Europe but EUR zone production innovation is not quite as dynamic as that of the US. Anyone for the Chinese Yuan?

    Reply
  6. Fred- I agree the $ is at some risk, and sometime in the future may not be the reserve- but it is for now.

    hopefully cooler heads will prevail on the protectionist ideas floating around. of course, USA is not alone- look at France’s attempt to shore up their auto industry.

    IMHO, the Yuan will not ever be the reserve currency because it doesn’t float freely ,and knowing the Chinese penchant for control, never will…

    my guess is that we’ll see the euro and the US share that status sometime in the future.

    Reply
  7. I was just joking about the Yuan but they hold more $US then anyone else. It is not out of the realm of possibilities that they could free the trading of the Yuan to protect their $US.

    When I first entered the Japanese market there were two types of Yen available. One was called free yen that the rest of the world could purchase and the other was domestic yen.

    After 30 years I am still buying $US because I have more confidence in the US then any other nation.

    Reply
  8. January barometer can be explained logically but does not have any predictive power. How Dow will end up in 2009 totally depends on whether the bottom will be formed within this year and how strong the rebound will be. The most notable failures of January barometer were the four consecutive fails from 1929 to 1933. In each of those cases Dow shot up in January but fell miserably through the year. For a thorough assessment of the barometer, please see Comment 65 on our website. FORCASTGLOBALECONOMY.com

    Reply

Leave a Comment.