Don't Dismiss History

 | Oct 31, 2011 | 3:00 PM EDT  | Comments
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Stock quotes in this article:

dtv

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hele

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sbux

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ma

While I'm certainly not one to bet on trends, followers of market statistical data are batting 1.000 in 2011. If nearly 100 years of data are to be believed, then November and December should be a favorable period for the U.S. stock market. The Stock Trader's Almanac (STA), an annual publication,  has compiled decades of market statistics based on various patterns and other esoteric patterns.

What is interesting about the STA is that it is not some cult publication with a handful of followers, but a book full of observable patterns spanning pre-World War II. Any serious investor should read it, not for trading tips per se, but because the data should be of interest to anyone with more than a casual interest in the market. After all, farmers have their almanac that they rely to compile weather patterns. And if thousands of market participants who collectively move the market are flipping the pages of the STA, then it's worthwhile for other investors to do the same.

Pattern One: Since World War, the month of October has ended 12 bear markets. How many bear markets have there been since WW2: 12. So while many investors see October as death trap for stocks thanks to 1929 and 1987, the data say otherwise. October is really known as a "bear killer" month -- it did just, that killing the 12th post WW2 in 2011 with a 14% October rally in the S&P 500

Pattern Two: November has historically been the third strongest month for U.S. stocks, while December is the second strongest month.

Pattern Three: Since 1950, a January that starts the year positive, almost always confers a positive year for the stock market. In 2011, stocks rose by more than 2% in January.

As a bonus option, you can add the fact that 2012 is a presidential election year. You can bet your last dollar that the folks in Washington will do whatever they can to help boost the economy to sway voters.

Indeed, patterns are not perfect. And even though the almanac or any other chart may not reveal, long-standing patterns often have a fundamental element behind them. After the market tanked in September, U.S. stocks were trading at 10 times forward earnings estimates. No wonder Warren Buffett stated he bought over $4 billion worth of equities in the third quarter. Even now, stocks are trading at about 12x forward earnings estimates, an attractive multiple. So far more than 70% of S&P 500 reporting companies have topped estimates.

The market looks set to start the week in negative territory. That could offer opportunity to buy quality names like satellite cable provider DIRECTV (DTV) or consumers products company Helen of Troy (HELE) at favorable prices. DTV shares trade for 11x forward earnings while those earnings are expected to grow by nearly 30% in 2012. Later this week, DTV will announce its third-quarter earnings, which are expected to be $0.73 a share, up nearly 40% over the year-ago quarter. Also this week, corporate titans including Starbucks (SBUX) and MasterCard (MA) will report their quarterly earnings. Quality results from Starbucks are expected, which will add credibility that consumers are feeling a little better about the economy.

Opportunity is at its greatest when everyone is automatically programmed to expect the worst. No one is suggesting that the economy is fully healed, but while everyone is pricing in a recession, the data are saying something completely different. Whether you want to bet on a pattern or not, the numbers and valuation metrics help support those patterns.

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