Monday, 30 January 2006

In the Year of the Dog, will stocks go to the dogs?

Despite some uneasiness earlier in the month, the first month of 2006 has turned out to be reasonably good for the world's stock markets, marking an auspicious start to the Chinese New Year and, if market lore is to be believed, portending a good year for stocks.

29 January was the first day of the Chinese Year of the Dog. Like all the other animals of the Chinese zodiac, it comes once every twelve years. It follows the Year of the Rooster.

Towards the end of the Year of the Rooster, it had looked as though equity investors were about to turn chicken. A scandal at a Japanese Internet company and weak earnings reports in the United States had investors scurrying out of stocks, causing massive price falls not only in these markets but around the world as well.

However, by last Friday, most markets had recovered and are now comfortably in positive territory for the month and year.

 30 Dec 2005
27 Jan 2006
S&P 5001,248.291,283.722.8
Nikkei 22516,111.4316,460.682.2
FTSE 1005,618.805,771.402.7
CAC 404,715.234,956.605.1
Hang Seng14,876.4315,753.145.9
Straits Times2,347.342,412.082.8

This is a reasonably good start to the Year of the Dog and could be a sign that stocks will do well in the rest of the year. After all, there is a market saying: As goes January, so goes the rest of the year. So if markets hold up for the remaining days of the month, this would suggest that the rest of the year would be positive for stocks as well.

Of course, this effect does not work every year. For example, it did not work last year, when the Standard & Poor's 500 was down in January but up over the rest of the year.

However, this year is the Year of the Dog. Does a Dog year hold any particular portent for stock markets?

As the Year of the Dog invariably falls on the second year in the US presidential cycle, one would suspect that it is not usually a particularly propitious year for stocks. That was true in the last Year of the Dog in 1994, when the S&P 500 Index fell 1.5 percent. The index also made significant cyclical lows in the prior two Dog years in 1970 and 1982, although it also displayed its own doggedness by making significant recoveries in the latter parts of those years to finish the years up 0.1 percent and 14.8 percent respectively.

The performances of other stock markets in the Year of the Dog have also been mixed. In the UK, the FTSE All-Share Index fell 7.5 percent and 9.6 percent in 1970 and 1994 respectively, but rose a whopping 22.1 percent in 1982. In Japan, the Nikkei 225 Index fell 15.8 percent in 1970 but rose 4.4 percent and 13.2 percent in 1982 and 1994 respectively, the latter taking place right in the middle of a full-fledged secular bear market.

However, while the Dog's bark is generally worse than its bite, investors in the Singapore stock market might want to be wary this year nevertheless. Historically, the Singapore stock market has been dogged by poor performance in the Year of the Dog, falling in each of the last three in 1970, 1982 and 1994 by 7.2 percent, 16.0 percent and 5.1 percent respectively according to the Morgan Stanley Capital International Singapore Index.

Thrice bitten, once more shy? The Dog certainly does not look like the Singapore investor's best friend.

However, recent experiences may not be good indicators of this year's stock market performance.

According to geomancer Raymond Lo, this particular Year of the Dog is symbolised by two elements: fire sitting on top of earth. As he says on his website, "The fire standing on top in 2006 is yang fire which is compared to the Sun. This element symbolises openness, optimism, warmth, politeness and care."

The implications for stock markets? "It is exactly such optimism that will create the positive trend for the stock market in 2006." But he adds: "However, investors have to be cautious towards autumn and winter as there will be substantial set back as the fire element will be weakening in 2007, and such weakening could start as early as the second half of 2006."

So bulls can hope to see more gains, but bears, who have gotten a mauling over the past few years, may finally get some respite some time this year.

Which should not be surprising. After all, every bear and dog has its day, even if it comes once every twelve years.


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Rob Dawg said...

January 2006 == Head Fake.

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