Rally-Mode Importance for the First Two Months

Introduction

February ended last week with the S&P 500 Index (SPX) up 8.6% for the first two months of this year. Reading the headlines and news articles every day, which seem to show a lot of pessimism, you wouldn't realize this is the best start to a year for the index in over 20 years! The last time there was a return better than 8.6% through February was 1991, when the SPX gained 11.2%.

After the Two-Month Rally-Mode

When the market is strong through February in any given year, rally-mode continues to gain further traction. Below are the five years since 1990 that had the best returns through February. In each of those years, the SPX tacked on even more gains after February. In fact, the worst post-February performance among those years was in 1998, when the SPX went up an additional 17% from March through December. That was despite a major pullback in the second half of that year. In fact, a caution sign could be that in two of the four other years the market corrected after its early rally, falling back to breakeven before making the additional gains.

Consistent Performance during Rally-Mode

Another impressive stat about this year is the consistency with which the market has performed. Through February, there have been 27 positive days for the SPX, compared to just 13 down days. That is the highest percentage of up days (68%) since 1995. That could be another positive sign, as 1995 was an amazing year; the market continued higher after February with a 26% gain.

Another positive sign, particularly for the bulls, is the MACD histogram for the S&P 500 Index (SPX), on a monthly chart, officially moved above the zero line on Thursday, March 01. For full details in relation to this aspect read MACD – A Technical Buy Signal.

However, one caution sign in the table below is that the year with the absolute best return through the first two months is 1987 -- the frightening occurrence --"Black Monday".

The Rally-Mode Implications

This is one of the best year-to-date performances we've seen in the last 20 years, yet when you read the headlines and listen to people on TV, no one is talking about that. Instead they talk about an incredibly long list of worries, like the euro-zone crisis, or rising oil prices, or high unemployment. There is a lot of fear out there about this market, which has been nothing short of astounding so far in 2012. It's an indication that there is plenty of money still sitting on the sidelines that these worriers are holding onto, because they're afraid to deploy it into the market. If they finally capitulate and decide to buy stocks, then huge gains for the rest of this year, like the 26% achieved in 1995, are not unfathomable at all.