Not even 24h into the new trading year and the U.S. futures point to a strong opening. The sliding dollar helps, but also the market’s resilience is fueled by investors’ buying frenzy.
As always, looking at past data helps better understand what the future might bring. Strong market performance in the last two trading months of the year brought a positive January and a double-digit gain into the new trading year.
Will that be the case in 2021 too?
Bullish End of Year Rally
The financial world is full of trading biases. This is nothing but one of the biases frequent in the markets – that an end of year rally is bullish for the year ahead. Historically speaking, whenever there was a double-digit gain in November and December of the year (i.e., more than 10% gain), January was also positive, and the year was positive too.
In other words, this bias tells us that the chances are that the rally in the U.S. stock market is set to continue. The first checkpoint comes pretty fast – at the end of January, we will find out if 2021 has a chance to confirm the bias.
Before jumping and buying stocks, let us consider what biases are. Historical market performance and studies do not confirm such biases – they are merely some statistics that suggest that this or that may happen. In other words, they do not hold true 100%.
However, investors are risk-takers by definition. Think of technical analysis – the art of interpreting historical price data to forecast future prices. Technical analysis is mostly based on patterns – or, if you want, technical biases. A reversal pattern like the head and shoulders or the rising wedge does not work 100% of the time, but they are proved to work most of the time.
In trading and investing, the key is to grow the portfolio, the trading account. One way to do it is to be right more than wrong or to have bigger winners than losers.
A portfolio is made up of various assets. Some companies may outperform others by such a large degree that they will compensate for other assets underperformance. For example, if an investor had Tesla in his or her portfolio for the entire 2020, the +700% increase over the last year was big enough to compensate for the loss in other assets.
In other words, testing such a bias as the one presented in this article is easier than it looks. Should January end up with a gain, the pressure on the buying side will increase exponentially.