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The Only Bears in Charge Might be from Chicago!

January 31, 2007

"There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards or crystal balls. Collectively, these methods are known as 'nutty methods.' Or, you can put well-researched facts into sophisticated computer models, more commonly referred to as 'a complete waste of time.'" -- Scott Adams, creator of the "Dilbert" comic strip

Dear Fellow Options Trader,

As we close the books on January, there are a host of market-predictive models vying for our attention. I've examined each one and taken into consideration a few special exceptions. And at the end of this week's missive, I will detail what's ahead for us in 2007.

Will the bulls or the bears triumph in the market this year? I don't know about you, but if I see the headline "Bears Win," I hope that it's when I wake up on Monday after the Super Bowl!

YET ANOTHER REASON TO WATCH FOOTBALL

The Super Bowl predictor, created by New York Times sportswriter Leonard Koppett, says that if the NFC team (or if it formerly belonged to the NFC) wins the big game, the S&P 500 will have positive returns for that year. Conversely, if the AFC team wins, the market goes down.

This has proved to be accurate some 75% of the time (30 out of 40 games). This slight modification to the Super Bowl indicator -- that of a former NFC team, such as the Pittsburgh Steelers last year or the Indianapolis Colts this year -- positions us for some (practically) guaranteed positive returns.

How's that, Doc? Because last year's match between the Steelers (formerly of the NFC) and the Seattle Seahawks meant we had what bettors know as "a lock," since, either way, the market was poised to go up. The same goes for this year's game, where my beloved Chicago Bears face the Colts. In other words, if you are a betting man or woman, the odds are in the bulls' camp for 2007. Mark that as Bulls: 1, Bears: 0.

LESS FABRIC, MORE GAINS?

I've always been a big fan of the Hemline Indicator, and all puns aside aside, this theory suggests that stock prices will rise when skirts are short, and will fall when skirts are long. Also known as the "hemline effect," this indicator was created by Wharton economist George Taylor in the 1920s.

If you've followed the antics of Britney Spears lately, you would know that this young lady certainly favors VERY short skirts. Of course, this single example would hardly make for a fair survey. Therefore, I called a friend in the fashion industry, and she said that a majority of the collections in Milan this fall and winter featured "gathered waists and skirts or dresses that were paneled, pleated, puffed, belted, layered, glittered -- and with generally shorter hemlines."

Armed with overwhelming evidence from Ms. Spears, Milan and the milder-than-normal winter, I'd say the Hemline Theory moves us further into the bulls' camp, so our score becomes Bulls: 2, Bears: 0.

AN 'EFFECTIVE' INDICATOR

Next, let's explore the January Effect, which dictates that, however the stock market goes in January, so goes the remainder of the year.

The January Effect has proved to be 91% accurate since 1950. Most of us would say that's a powerful evidence of its forecasting ability, but some say that the predictor isn't necessarily based on the performance of the entire month, instead just the numbers from the first week of January.

However, given that the first week of January was a shortened one (and otherwise not very memorable in a positive way), let's take the full month into account. That said, the Dow jumped 162.15 points, the S&P 500 rose 20.21 points and the NYSE Composite spiked 116.77 points from the beginning of the month to today's close. Thus, we can easily say the January Effect puts us solidly in the bulls' territory, which pushes our scoreboard to Bulls: 3, Bears: 0.

TWO SIDES TO EVERY STORY ... AND TRADE

So, there you have it -- the bulls are clearly (and sort of scientifically) in command, and so strong are the readings that the contrarian case must also be made. For that viewpoint, I called one of the most eloquent spokesmen I know, and although I will not use his name, trust me when I say that you know him, too.

His thoughts?

"I don't think you can put an endpoint on the market way out in December 2007 based on January 2007. But the bears aren't just getting bruised; they are getting bloodied (by) betting against the market. That does make the bulls' job easier, as each bear throwing in the towel gives that much more boost to these rallies. But when they've taken out the last bear, who's left to buy?"


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader


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