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Assume Nothing for 2007 in the Stock Market
By Price Headley | Published  12/29/2006 | Stocks | Unrated
Assume Nothing for 2007 in the Stock Market

If you're using the last week of the old year - or even the first few moments of the new year - to help you predict what the rest of the month may be like, you might want to rethink things.

Last year ended bearishly.  The market was heading south for the entire week between Christmas and the new year. Then, 2006 started with a huge bullish bang, with the rally continuing for six more days after that initial monster gain. On the eighth trading day of the year, we started a tumble that would give back almost all of the early January gains. We made a partial recovery by the end of the month, but undoubtedly the volatility gave plenty of traders whiplash - in addition to faking them out.

S&P 500 - December 2005 through January 2006

The year before that (the transition from 2004 to 2005) was different, but just as violent. We actually ended the year on a mildly positive note, which had a lot of investors expecting gentle bullishness once 2005 came. Wrong! Stocks started selling off hard on the first day of the year, and didn't really look back until late in the month.

S&P 500 - December 2004 through January 2005

The point is, assume nothing. The last couple of years, January started out pointed a different direction than where it was pointed at the end of December. In one of those January's (2005), we saw a strong mid-month reversal. In the other (2004), we didn't see the sellers take a break for three weeks.

So are the odds that 2007's start will be a reversal of what we saw in late 2006? The prior two examples say so, but truthfully, we'd have to say that's more coincidental than cause/effect. Instead, we'll just warn you again to assume nothing. I've already heard from a lot of traders that have mapped out a plan for the first few days of the year. That's fine as long as you understand the risks. Just be sure to keep these two charts above in mind if things don't go your way.  This market has been rocking-and-rolling the last two times we started January, and it may turn against you in a hurry.

On the flipside, whatever happens, that early volatility can make for a fantastic trading opportunity. So once you have your bearings, you may be able to make a lot of money in a short period of time.

We wish you tremendous prosperity in 2007.

Price Headley is the founder and chief analyst of BigTrends.com.