Stocks Set to Post Gain in 2012, History Shows

NEW YORK (TheStreet) -- If history holds true, there's a good chance 2012 will be a prosperous year for investors after the S&P 500 increased almost 2% in the first week of January.

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.

Interestingly, 2012 started off by giving the dogs of the market a chance to outshine the 2011 winners. Leading the pack was Netflix ( NFLX), Micron Technology ( MU) and Bank of America ( BAC). On the flip side, among the biggest losers were the utilities and consumer goods industries, which led the pack in 2011.

A cautiously optimistic approach to 2012 is probably the best way to invest at the start of the year. Increasing exposure to the stock market will likely juice returns, but it's important to keep in mind that there will continue to be volatility in the market. A balanced portfolio will be the right investing approach this year.

-- Written by Lindsey Bell in New York.

>To follow the writer on Twitter, go to Lindsey Bell.

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