After the first few days of trading to start 2016, I am sure this question is on the minds of many investors. The start of 2016 has been less than stellar for the stock market and I am sure it has caused some nervousness in the investment community. There are many problems in the world today and it seems that the news only reports the negative; rarely does the news report the positive that is happening around the world. This tends to exacerbate the negativity surrounding the market and causes more volatility. While volatility can make your stomach churn, it can also create opportunity.
Let’s take a look at the historical significance of the last five days of the trading year and the first five days of the trading year. The last five days of the trading year are usually termed the “Santa Claus rally”, because the market is up most of the time during that period. We did not see this at the end of 2015. Historically speaking this is an indicator that the following year will be negative. The first five days of the trading year are a very good indicator of what the market will do for the rest of the year. In fact, when the market is up the first week of the year it usually finishes positive over 85 percent of the time. If the market is down the first five days of the trading year, the chance that we have a positive year drops to just over 50 percent. That is a very large drop in odds that we will have a good year in 2016.
I know what everyone reading this is thinking. The world is a mess. China is falling apart. There’s a credit bubble that was created by the Federal Reserve. North Korea has an H-bomb. I could go on and on, but I won’t. The one factor that we need to look at with any investment is how much money does this company earn? At the end of the day, earnings are what moves stock prices. There are many solid companies that have already reached bear market territory. By definition that means they are down more than 20%.
There is one question you need to ask yourself, am I an investor or am I a short term trader? Investors make money over the long term by taking advantage of selloffs like the one we are experiencing. Traders try to pick the direction of the market on a daily basis. In my 20 years of experience, I have rarely seen someone who is a successful trader, but I have seen many successful investors. Make sure you know what camp you fall in or you will lose money. The opinions expressed in this article are that of the authors and should not be considered investment advice for your unique financial situation.