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While I was sitting in the car waiting for Steph the other day I began gathering my thoughts for this newsletter. I knew I wanted to write about the world's largest thermometer in Baker, California. We actually saw it on our way back from the Las Vegas Trader Expo! Not as exciting as the largest ball of twine, I might add.
As I began to write I paused and noticed I was right by the Four Seasons Hotel in Beverly Hills. It was fitting because we are hitting the fourth season of the year, Winter, on De cember 21st and I thought about the weather here and all around the country. For those of you feeling the frigid breezes and unruly snow, I am going to gift you some LA heat with this article's hot tip. Then, as I always do, I started thinking about the markets.
I was thinking about people's seasonal behaviors and how they effect price behavior in our financial markets. Let's review the year and let the current temperatures deliver the message.
My hometown, Chicago, the Futures Capital of the World, is now experiencing mercury readings locked limit down at 0. Rest assured Punksatony Phil will see well past his shadow and temps will eventually rise again. Of course they will climb to unbearable summer extremes locked limit up at times reading 100.
When you know you won't see temperatures climbing above 50 degrees consistently until May, don't get false hopes when a 50 degree day shows up in February. From experience you know the temperature is "overbought" or way too high for that time of year and will plunge back toward 0. Sell those temperatures at 50 in February!! On the flip side, you know not to go crazy when you get a 50 degree day in July. Buy those low temperature readings in July, because you know they are going to climb.
Let's first talk about a baseline to help us get started. In the Midwest you will see temperatures oscillate from an approximate equilibrium mark of 50 degrees over the 12 month cycle. What is the 50 degree mark in the financial markets? Start with the closing price of your favorite market on December 31st (50 degree-baseline). Once you have this price begin to factor in some history of market volatility. You can find numerous free sites on-line to help you track some past yearly highs and lows to help you get a sense.
Let's take the stock market index benchmark, the S&P 500, for example. Generally speaking it will provide a rounded up average return of 10% per year. Just as you already know from experience that temperature readings move from approximately 0-100 in Chicago, the S&P 500, from my experience and knowledge, will swing approximately 10% higher (equivalent to 100 degrees) on a perfect bull run from the December 31st close and possibly swing 10% lower (equivalent to 0 degrees) on a perfect bear run from the Dec 31st close. On abnormal cycles like 2008 we witnessed extremes, so my definition of 0 to 100 widens as stand-out global events hit the news wires. We all understand this just as you know temperatures move outside of expected projections as well.
Adding to our projections we need to take into account the market "gas tank" and realize that seasonally Americans start pumping their 401k tank full with money in April. This is due in large part because of the tax incentives you get for the previous year. We are procrastinators by nature so we tend to wait until the last moment. You know the date well, April 15th.
As spring thaws us out from the deep freeze of winter, we approach the warming temperatures of June. Begin to compare the current price to the previous December 31st close and the price on tax day, April 15th. If we are higher than those benchmarks a nice finish is generally in store for the end of the year. If we are below those prices come June, a nasty finish might be on the horizon. Just as our friend Punksatony Phil lets us know if there will be six more weeks of winter, the temperatures of June will give us an indicate or whether we should prepare for a Chicago "Bulls" ride or a Chicago "Bears" ride the last 6 months of the year.
Prosperity is at your fingertips. Go Grab It!!
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