As Sam Sees It: Why Investors Shouldn't Be Rattled By This Indicator

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

EQ: February 10 marked the new year on the Chinese lunar calendar. Considering that it is the Year of the Snake, which is the only year of the Zodiac cycle that has averaged an annual decline, what can investors expect to see?

Stovall: If history were to repeat itself, and there’s no guarantee it will, there could be a bit of a concern in that during the Year of the Snake the S&P 500 has fallen an average of 3.8 percent going back to 1900, and the “500” has risen in only 33 percent of the observations. In other words, the market has declined for the full year more times than not and has declined deeply enough to get investors’ attention. So if you believe in a correlation between this indicator and the market, then you might want to tread lightly in 2013.

EQ: How much weight should investors put on these more unconventional indicators?

Stovall: I think that this indicator should definitely be taken with a pretty large grain of salt. The reason is that some indicators demonstrate correlation with causation, meaning that they measure things that actually do have an impact on the overall market. However, indicators such as the Super Bowl Theory, numerology (numbers ending in 1, 2, 3, and so on up to 10), as well as looking at the Chinese lunar calendar all demonstrate correlation without causation. So there’s no reason why, for example, an NFC team winning the Super Bowl will cause the market to go up, or why years ending in 5 have never declined since 1900, or why the Year of the Snake will end up causing the market to trade in negative territory for the full year. It just ends up being an interesting correlation.

EQ: You also noted that this indicator may overlap with other indicators, which may help to explain some of the reasons. Can you talk about that more?

Stovall: That brings up an interesting point in that there is a possible reason to explain why the Year of the Pig has seen the S&P 500 perform so well, rising an average of close to 13 percent, and falling in only one observation (1923). I think it’s because the Year of the Pig coincides with the third year of the four-year presidential cycle, in which investors bid up stocks in anticipation of the year-four impact of economic stimulus injected by the party in power to improve their chances of getting reelected.

In addition, I think that the Year of the Snake could have the performance of the S&P 500 impeded because of where it falls in the four-year presidential cycle. It usually occurs in the first year, which has proven to be the weakest year on average for equity prices as the President typically administers tough medicine in order to get the country back on its feet by reelection. So you could say that maybe there is a bit of correlation embedded in this Chinese lunar calendar because it does tend to overlap either with the good years of the presidential cycle or the bad years depending on the animal.

EQ: Over 70 percent of the companies on the S&P 500 have reported Q4 earnings so far, and for the most part the trends seem positive. Has anything stood out to you?

Stovall: There are two things. First off, I continue to be pleased that the revenue number is coming in relatively favorably. Capital IQ consensus data show that the Street is now expected to show a 4.7 percent year-over-year increase. Last quarter, we had a 2.5-percent gain in earnings, but only a 0.5-percent increase in revenues. This time around, we’re seeing an earnings gain of about 6.5 percent. So that is a bit reassuring in my opinion that maybe the revenue picture is beginning to turn around.

With that said, I am a little bit concerned with the increase in earnings for the fourth quarter of 2012, which appears to be coming at the expensive of the first quarter of 2013 estimates. As we approached the fourth quarter reporting period, the expectation was for a 3.4-percent advance, and then for a first quarter 2013 advance that would be slightly better than that. Now with Q4 likely to be up more than 6.5 percent, Q1 2013 is expected to be up only a little more than 1 percent. So a lot of the strength of Q4 2012 seems to be coming at the expensive Q1 2013. I hope that we find that this is a coincidence that will not actually play out, but rather analysts are just underestimating the earnings growth that will likely be seen in the first quarter of this new year.

EQ: Last week, the S&P Investment Policy Committee said that gold could be setting up for a big move higher. What’s the reasoning for that potential move?

Stovall: Our Chief Technician Mark Arbeter says that the price chart of gold shows that it could be setting up for a relatively sharp move higher. What’s driving it is the Commitment of Trader’s (COT) data is showing that the supposed “smart money” is beginning to move quite aggressively into the yellow metal, while at the same time, the “dumb money” (individual investors) is moving out. Also, we find that the individual investor sentiment toward gold is falling to one of the most bearish positions in the past five years. From a contrarian perspective, we think this very bearish sentiment toward gold could end up being a positive.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

Market Movers

Sponsored Financial Content