A Powerful Trend That Wall Street is Ignoring

Robert Lara's picture

Friday, September 7, 2012 - 12:00pm

by Robert Lara

Right now, investors should be taking note of a powerful 20-year trend that carries a perfect track-record: A 100%, dead-on market factor that offers bullish investors a competitive edge.

If this trend holds true once more, then by year-end a pot of gold could await those brave souls who can look past the headline risk of the euro zone, impending fiscal cliff, presidential election, and of course slowing economies of China and other emerging markets.

Here's what you need to know...

When the Dow Jones Industrial Average ends the January-August period on a positive note, the index consistently goes on to finish the year in the black...in several cases more than 50% higher. And considering that the Dow just finished the January-August period with a hefty 7.2% return, investors have to ask themselves whether they are going to play along with history or buck the trend. 

My bet is on the trend.

As the table below illustrates, the Dow finished the January-August timeframe on a positive note in 12 of the last 20 years. Remarkably, the index went on to climb higher from its August close in 10 of those years. In the remaining two positive periods (2007 and 1994), the index still finished positive, dipping a mere 2% or less below its August close -- and that's a relatively small downside trade-off for a chance to make awesome double-digit gains.

If you're not convinced just yet, then consider the inspiring transformation that happens in the last four months of the year when the return was negative. In five of the eight negative periods -- 2010, 2005, 2004, 2001 and 1998 -- the index improved in the last four months of the year, with three turning positive prior to the end of the year (2010, 2004 and 1998). Two of the remaining negative periods (2002 and 2000) averaged a minor 3.5% loss. As expected, the year the Great Recession hit --  2008 --  shows the Dow's worst performance, with the index plummeting more than 20% below its August close. 

There's no doubt that during the past 20 years, returns following a post-August rally are historically strong. But is 20 years long enough to establish a trend? While we could argue for hours on the time frame required to support or define a trend like this, there is a simple, straightforward measure that lends the trend a positive bias. 

Just look at how each calendar month measures up for the Dow. 

The news of late has noted that September is the worst month of the year for the Dow. But this isn't always the case, particularly when the index is positive heading into it. During the 12 years in which the Dow finished the January-August period with positive numbers, the average return for September was 0.4%, which is a very different number than the average loss of 2% that's being touted by many news sources. Furthermore, December is one of the best performing months for the Dow, while November and October also have a positive historical trend. 

Action to Take--> Savvy investors looking to capitalize on this little-known trend can use the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) to stake their claim. I suggest investors use the early September headlines and reports to take full advantage of this trade. An early disappointment in the headlines -- whether it's Mario Draghi and the European Central Bank; Ben Bernanke and friends; reports on employment, manufacturing, productivity, or consumer sentiment -- could provide a 1-3% pullback that investors can use to start a position.  

Robert Lara does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.