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Investors: Forget the Market Theories; Watch These Two Sectors to Determine Broader Strength


Considering semiconductors are in almost everything consumers buy, and all consumables have to be transported, these sectors typically lead economic expansion.

Coming into the end of the year is always tricky considering the 'September-October' customary nature of the markets. Within the next week investors will begin to hear about how on average, over the last 100 years, these two months provide the worst returns – the calendar effect. But why stop there, Alice? In continuing down the rabbit hole there is the presidential cycle to contend with, and the idea that the first year after the election is typically the worst of the four. Where should investors draw the proverbial theory line?

(The January effect, the quarter-end effect (window dressing), "sell in May and go away," leap-year phenomenon, Halloween Indicator, Super Bowl (AFC/NFC) winner correlation, and let's not forget the lunar cycle theory. We could go on for pages with theories developed over the last few decades. Truth be told, anything can be verified with the appropriate statistical data, and this week, which involves the quarter-end effect, is packed with economic statistics: Tuesday: Case-Shiller Home Price Index, Consumer Confidence, Investor Confidence; Wednesday: New Home Sales; Thursday: Durable Goods, GDP, Jobless Claims, Manufacturing Index; Friday: Personal Income & Spending, Chicago PMI, Consumer Sentiment.)

Ascertaining probabilities based on empirical data – that is, on observation rather than theoretical data – is where my firm hangs its hat. Over the last two weeks we've discussed how the market (the S&P 500 Index (INDEXSP:.INX)) has broken above the technically important 1,425 resistance level. Conversely, our editorials have also discussed the necessity to see further empirical evidence to give credence to the longevity and conviction behind this move. Last week's action, not seemingly apparent in the market's return, was not good as the probabilities leading to the underlying confidence behind this move deteriorated rather quickly.
No positions in stocks mentioned.

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