The Ides of March Upsetting The Market Rally?
by Ian Harvey
March 17, 2013
Friday, the 15th March, otherwise known as the “Ides of March”, put an end to the winning streak of the Dow Jones Industrial Average (DJI). The Dow had risen for the tenth consecutive day on Thursday, posting its longest winning streak since November 1996. The index is now up about 11 percent so far this year.
The March phenomenon also coincides with a time of year when an abundance of portfolio maneuvers take place ahead of the end of the quarter.
Will the Dow shake off this phenomenon and continue on its upward trend or will the "Ides of March" stifle the rally?
It is worth noting where the saying “Ides of March” originated from:-
One of the best known beginnings was from Shakespeare's Julius Caesar of 1601. 'Beware the Ides of March' is the soothsayer's message to Julius Caesar, warning of his death.
The Ides of March didn't signify anything special in itself - this was just the usual way of saying "March 15th". The notion of the Ides being a dangerous date was purely an invention of Shakespeare's; each month has an Ides (often the 15th) and this date wasn't significant in being associated with death prior to 1601, as was noted from the Roman calendar…..
Months of the Roman calendar were arranged around three named days - the Kalends, the Nones and the Ides - and these were reference points from which the other (unnamed) days were calculated:
Kalends (1st day of the month).
Nones (the 7th day in March, May, July, and October; the 5th in the other months).
Ides (the 15th day in March, May, July, and October; the 13th in the other months).
Since 1950, there have been only twelve other instances when the Dow was up more than 8 percent going into mid-March. In ten of those years, the index continued to build momentum one, two and three-months out without any significant pullbacks.
During bull markets, defined by a prolonged period in which stock prices increase at a faster pace than their historical averages, the Dow realized gains of over 4 percent three-months later, according to Morningstar Data.
The following table displays the Dow Jones percentage change in the months following the Ides of March when the index was up more than 8 percent.
|Dec. 31 to March 15||1-Mos Later||2-Mos Later||3-Mos Later|
Benefiting from Past Knowledge
In each of the past four years, any advances in the U.S. equity market that occurred in the first quarter (as is happening now in 2013) have been more than reversed by deep “corrections” in market values that come on with the fury of a March wind with the onset of spring.
Whether it was the Federal Reserve’s premature (although pre-scheduled) termination of its first round of mortgage buying (restored after a few months and pursued to this day) in 2009, or the onset of the re-emergence of the Greek/Euro financial crisis in 2010, or the opening acts of the US debt ceiling crisis in 2011, or the re-emergence of the Greek crisis, spread to Spain and Italy, in 2012 – the result was always the same: A swoon in stocks in the spring. The old saying, “sell in May and go away” is now irrelevant in today’s market and is being replaced by, “May’s too late” as stocks hit lows on their way to summer.
Will this happen again or will there be a continued bull-run and slight pullbacks?
Each year, however, those who bought while the correction bottomed reaped large rewards by autumn as a combination of political fixes in the U.S. and Europe and Federal Reserve market interventions pushed and pulled stock prices back up to the point where, in 2012 for instance, the S&P 500 equity index finished up 16% for the year! Needless to say those who bought in the spring trough were up way more than 16% percent for the year.
For the past four years, it has been possible for professional traders to employ various “tools” to manipulate the market down to their advantage – first to generate profits from their “short” positions, and then to buy stocks they have driven down on the cheap side.
Gaining Sensible Perspective
It’s important in this market scenario to recognize that not all the naysayers and analysts are disinterested observers. Facts are stubborn things, but they can get drowned out in the torrent of negative sentiment, especially among ordinary investors who do not routinely “short” stocks either directly via derivatives and option positions, and thus don’t realize that the market is infested by doomsayers!
Market manipulation downward has thrived in an environment where pessimism has become the norm. Market seers try to win book contracts by predicting the next “black swan” event – but when everyone sees black swans on the horizon; they’re no longer rare – or credible.
Reading the Market
Those who try to make sense of the stock market reside in two camps:-
• Fundamental Analysis (using historical data such as earnings, revenues, interest rates, etc.), and
• Technical Analysis (using a myriad of different predicting tools, mostly charts and cycles, also historical).
In between these are:-
• the Quants (Quantitative Analysts) and
• Behavioralists (Behavioral Economics/Finance).
The most recent tool of Technical Analysts - along with Price, Volume, over Time (charts) - is Sentiment. This is a powerful aid to ascertaining market direction by going against the "herd". Known also as Contrary Opinion, what is usually misunderstood is that the general public is usually correct in the trend, until it isn't! It is at the extremes that they are totally wrong, causing Bubbles.
Several Sentiment Indicators, used for differing time frames, can be found in the article ”Sentiment Indicators”.
Despite the emerging good news on the U.S. economy – significant housing recovery (prices up 5.5% in November, the biggest jump in five years), continued low inflation, steady reductions in weekly unemployment claims, cash-flush corporations, solid bank earnings, increased business lending – there are many hedge funds who bet short on the market for the start of this year, and now have a bad case of performance anxiety.
Investors should remember that there are two cures for this hedge-fund ailment: playing catch-up to the market (which can get expensive) or try to “talk the market down” to their level. The latter tactic worked rather well for the past four spring seasons, and even again early last autumn. It will pay a lot of dividends in the coming weeks to pay more attention to data and facts than reports of black swan sightings.
Many good reasons may emerge in the coming weeks – government shutdown, sequester fall-out, Mideast unrest, oil prices, Italian politics – that would warrant a stock market correction as we leave winter behind. But none of these events necessarily means a new Armageddon. And the fact that the market crashed in spring each of the past four years does not prove that history will necessary be correct – and a repeat is imminent – maybe all will be finally right, after four years of being ... disastrous at the time of Ides of March!