Thursday, January 31, 2008

February Forecast: Flat or Fool's Trap

Given the S&P's 6.1% drop in January, the forecast for February doesn't look good. Since 1950, every January drop of 5% or more - except one - was followed by an unremarkable February performance of between -2.5% and +0.9%.

The only exception to this January-February trend was in 1970, when a 7.7% drop in January was followed by a 5.3% rally in February. However, this rally was a sucker trap, as the market proceeded to fall 22% through March and April of that year, completing a -35% bear market.

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