According to the Stock Trader's Almanac, there's an 87% probability the benchmark index will increase this year if the first five days of January are up -- known as the First Five Days theory. With only one more trading day to go in the first five days of 2012 -- today -- there are reasons to be optimistic.
Granted, 2011 was an exception to the First Five Days rule, after an increase of 1.1% at the start of the year, the stock market recorded flat performance for the year in total. Many are predicting that the record levels of volatility that characterized 2011 will remain in 2012, though it's expected that volatility will subside in the second half of the year as Europe works out its debt problems, the U.S. economy may gain further stimulus and the presidential election erases policy uncertainty. Many economists are feeling more optimistic about the potential for 2012.Last week's 1.6% gain in the S&P 500 was characterized by outsized returns out of the gate on Tuesday, the first trading day of the year. The market gave back some of Tuesday's upside during the remainder of the week, as European concerns resurfaced. A solid December employment report rounded out the week Friday, providing further evidence of an improving domestic economy. The unemployment rate dropped to 8.5% (from 8.6%), the fourth decline in a row. The holiday-shortened week saw light volumes. With the start of the New Year, hedge fund and institutional investors were given a clean slate to get reinvolved in the risk-on trade. Certainly, the early gains in the S&P 500 should help to induce those funds to put many back to work in stocks.