Stock Trader’s Almanac’s Jeffrey Hirsch: Here’s What To Expect In 2005

The following is an interview done by Dave Goodboy in conjunction with
RealWorldTrading.com.
After you read the interview, talk about it
here.

Jeffrey:
Great.

Dave: Can you tell me a little bit about
the history of the Stock Trader’s Almanac?

Jeffrey:
How I got into it was via my family. My father, Yale, started the Hirsch
Organization in 1966 for the purpose of producing the Stock Traders Almanac, his
brainchild of putting all the historical patterns, seasonal patterns and
indicators in the form of a desktop calendar that could be used by traders and
investors. The first edition was out in 1968 and it has been published
continually since then. I came on board in late 1989 and began working my way
in from the ground up. I learned everything mentoring at my father’s side for
the past 15 years. In 2001 I took over the lead role and, basically, the
company.

Dave: What got your father into this
business to begin with?

Jeffrey: Actually it was his cousin, Samson Coslow, my godfather,
who was a Hollywood producer and songwriter. He produced Copacabana, and wrote
the songs we all know, My Old Flame and Cocktails for Two. Sam
had become interested in the market when he got some stock from one of his
publishing companies. It was RCA or something like that. It immediately
plummeted. He didn’t like losing money so he became a student of the market
over the next few decades. I think it was 1960, or 1961 when he decided to
start something called “Indicators Digest” which was a breeding ground for
analysts and newsletter editors over the years. When he started it, he put out
an ad in Barron’s. It performed in a big way, so he called my father, who was
writing songs with him and working in that industry at the time and asked him to
run operations with this new service.

Dave: What I find most interesting in the
book is the way it’s setup. Month-to-month and basically talk about what is to
be expected. This month I know you have something called the January Barometer.
Can you tell us a bit about this?

Jeffrey:
Sure, the January Barometer was devised by Yale In 1972. It simply states that
as the S&P goes in January, so does the S&P for the year.

Dave: Why does this seem to work?

Jeffrey:
It gets a lot of questions these days with it being accurate. People tend to go
back and look at too long of a period of time. They’ll go back to 1906, but
it’s not really relevant until the passage of the Lame Duck amendment, the 20^th
amendment of the Constitution, which was ratified in 1934. It didn’t really have
an impact until 1939 because the Democratic members in the Congress were so
weighted to their side that it have an effect until 1939. It had a perfect run
in odd-number years. We know Congress has convened in 1939 to 1999. In 2001
and 2003 we had incorrect readings because there were some unexpected events
which affected it. Mainly the two rate cuts in ’01, September 11 later in the
year, and then the anticipation of the invasion of Iraq in ’03. The reasoning
behind it is that now the new Congress people, who are newly elected, will
reconvene in January instead of being lame ducks, and not convening 13 months
later the following December. They also moved the inauguration date from
January 20^th to March 4^th.

Dave: OK, let’s dig a little deeper
here. Why exactly do you think the barometer has been so accurate?

Jeffrey:
The logic is that we have all these important politically market-moving events
packed into the month of January, such as national budgets, priorities and
agendas. Bush is already out talking about Medicare, medical tort reform, and
other things. There is also a tendency for a decent amount of cash increase in
the market in January because of all of the bonuses and year-end portfolio
restructuring and beginning of the year portfolio restructuring. During the
first three days of the year so far we have seen that money sit on the sidelines
for some profit taking here. But it tends to make January an important month
for indicating where things are going. Because you have all these political
decisions going on, all this money coming into the market, and a lot of
prognosticating and forecasting from the strategists. If you look at the
television and the newspaper you see everyone has their forecast out right now.

Dave: I know you guys narrow the January
barometer down further into what you call the “First five days of January’s
early warning system.”

Jeffrey:
I don’t think I can call it narrowing down, but it is another indication that
you have the opening of the year significantly indicative of what is going to
happen for the rest of the year. It’s not quite as accurate because it’s a
short period of time, so anything can sway that, like a random event. It has
been much more effective on the upside. When the first five days are down, it’s
been 50/50, so up ten and down ten.

Dave: So just based on that, these first
few days being down, what are your thoughts?

Jeffrey:
There is that and the Santa Claus rally which is even negative this year. It
adds to my already existing caution because you always are that way. I think
the market can move a bit higher here but it needs to show some strength and I’
still concerned and getting a little more cautious. We already moved up stops
on a number of our holdings in our newsletter portfolio just to try to lock some
profits because the market was running away.

Dave: Let’s say January closes down—what
are the odds of the year closing down?

Jeffrey:
I think it increases the odds. The year right now is a precarious year with it
being a post-election year even though we re-elected a president, which is a
little bit better. We are coming into the third year of the bull market, we are
past the average length of a bull market, the markets have run a long way,
interest rates are rising, and the dollar is struggling. Where is the next good
news going to come from? I’m worried about 2005 in general and a negative
January would add to that.

Dave: Moving into February, you guys talk
about the President’s Day cycle. Is it the day after President’s Day, or is it
the day before?

Jeffrey:
The day before is down, and the day after tends to be up. There is a little bit
of negativity going into that holiday, and a little bullish bias coming out of
it.

Dave: Moving into March, I know St.
Patrick’s Day is a big holiday on Wall Street. Is the market usually up or down
on St. Patrick’s Day?

Jeffrey:
Actually, the day before is a little bit better, but you are talking about a
small percentage play. It’s something that is more geared toward the nimble
market trader or the day trader.

Dave: So it’s not something that you can
rely on?

Jeffrey:
It can be relied on. The thing with St. Patrick’s Day is it tends to fall
around triple-witching. There tends to be some revelry with Wall Street
participants on the St. Patrick’s Day. So it might be a little bit effected the
following day. This year the following day is triple-witching day. That may be
a precautionary flag for me.

Dave: Now I know the traditional wisdom
about triple-witching, and that it sends the market in crazy directions. Does
that still occur, or does it produce less volatility?

Jeffrey:
I still see it being a volatile period of time. The best bullish
triple-witching period is December, which is the fourth quarter fuel that helps
it both the week of expiration and the week after. The last 13 years the
expiration in the 4th quarter is up 11, and down 2. The March expiration week
is up 10, down 4. The week after is quite negative, up 4, down 10. And then
the middle expiration weeks, the June or September period, has had a negative
bias in the past 13 or 14 years.

Dave: Moving to April, does April provide
the best odds for up-movement in the market?

Jeffrey:
It is best for the Dow. Not the S&P 500, because its best time is in December.
The NASDAQ’s best month is January. But April ranks high over a number of
periods of time. It’s also the last month of our best six-month switching
strategy. Generally, we tend to become a little cautious in anticipating a
correction after the markets run their course in the first quarter of the year
depending on where we have gone.

Dave: Tell me a little bit about the
six-month switch strategy, what is it?

Jeffrey:
What we have found is that most of the market gains have occurred in the months
of November through January. This is something that I practice myself in my
401(k) and something we trade in the ETFs with our newsletter portfolio. We
have seen the market spend the months of May through October either down or
flat. With the NASDAQ, it goes a little bit further, into 8 months. From May
to June it tends to be stronger. What we have seen is that in the period of
July to October the Summer doldrums/Fall correction period, tend to have a
negative bias and become a period of caution. So for a portion of portfolios,
or for one strategy over the long period of time, it has paid to be in the
market from November to April, and out in the May to October period. I can give
you some numerical representations. If you take $10,000 and invest it in the
Dow starting in 1950 in the best six months, it increases to $492,000. If you
put it in the worst six months, it becomes $9,682. You have a loss of $318,
versus the gain of $482,000. The point is to be cautious when you are putting
money into the market toward the Spring and Summer, and to be more aggressive in
the Fall after there has been a correction. In 2003 it didn’t happen that way,
but in 2000-2002, we saved ourselves from some substantial losses, and
capitalized on the rallies that occurred during the 4^th and 1^st
quarter of the years.

Dave: I know you guys take this strategy
and apply some technical indicators to make it more powerful. Can you explain
that a little bit?

Jeffrey:
Well, we use the MACD indicator so we can see when momentum shifts. When we get
into that toward the end of the seasonally bullish period, we begin to look at
the lines to cross, which will indicate a shift in momentum, and when we get
into the end of the bearish period, we start looking for the lines to cross for
a buy signal. We use two different MACD indicators, and their explanation is
available on the website online. What this has done is increase the gains in
the best six months to $1.4 million, and the loss on the worst six months to
$6600.

Dave: This is all explained on your
website?

Jeffrey:
Yes, and the newsletter as well. It’s explained on the website and we talk
about it in the newsletter every year.

Dave: Is that the most accurate pattern
that you guys have found?

Jeffrey:
I would say it is one of the more consistent and reliable patterns when we use
the MACD to increase the gains. It has had its years where it has worked the
other way, but it is something I use in my personal investments so I definitely
think it is reliable.

Dave: Is there a particular day of the
month that’s more bullish than any other day?

Jeffrey:
I wouldn’t pick one day. I would focus on the beginnings and ends of months.
We have now started to see the middle period where you see an infusion of
capital from the bi-weekly, or twice monthly 401(k) investments that come out of
a lot of paychecks.

Dave: Around holidays you hear a lot of
talk about their effect on the market. In general, what do you find, let’s say
three days before and after a holiday?

Jeffrey:
Different holidays work in different ways. We didn’t get the positive pop after
New Year’s Day this year, but generally the positive bias is after New Year’s
Day and Memorial Day. Where you have positive bias before and after are: Labor
day, Thanksgiving, and Christmas. And then there are some with a negative bias
like President’s Day, Easter, and July 4^th. Some of this has to do
with the time periods in which they fall. Independence Day falls in the Summer
doldrums; Thanksgiving and Christmas fall into the November and December bullish
periods.

Dave: Is there anything with Halloween,
and the end of October?

Jeffrey:
I haven’t seen anything significant, but it is that period of time where the
worst six months are ending. But other than that there is no major seasonality
around Halloween.

Dave: Is there anything you would like to
leave our members with?

Jeffrey:
Sure, there is a whole host of patterns that are applicable for each year. The
thing to remember is not to follow them religiously to a T, but to use them as a
guide to understanding what makes the market tick. As what George Santayana
said, ‘Those to fail to remember the past tend to repeat it.’ We think that
those who study market history stand to profit from it.

Dave: Thank you for joining me today.

Jeffrey:
My pleasure.