Chinese New Year of Water Dragon Is Bullish for Stocks

Chinese New Year has given rise to the year of the Water Dragon, a period that throughout history has been especially bullish for the Dow and S&P 500.

The Chinese Zodiac is comprised of 12 periods, each identified by an animal, and each associated with an element. The elements are wood, fire, earth, metal, and water.

For those who are not familiar with the Chinese Zodiac, this is the year of the Water Dragon. The last time the sign of the Water Dragon appeared was in 1952, which, like 2012, was an election year. President Eisenhower was elected in November 1952, and the exact Chinese Zodiac dates from that year were January 27, 1952 through February 13, 1953.

During this period, the Dow Industrial Average was up 3.6%, but as charts below will indicate, it was an exciting year.

Since 1952, there have been four other Dragon years as part of the 12-year cycle. The average for the five years is a gain of 5.8% using the Dow Industrials before 1980 and the S&P 500 in later years.

The Water Dragon year in 2012 runs from January 23, 2012 through February 9, 2013. On Monday, January 23, the S&P 500 opened at 1315.29. An average Dragon-year gain of 5.8% in 2012 would mean that the S&P 500 would close on February 9, 2013 at 1391.57.

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Chart Analysis: The Dow Jones Industrials started the 1952 year of the Water Dragon at 273.7 before declining to a low in May of 256.3. This was a decline of 6.4%.

• Stocks rallied sharply from that point, peaking in early January 1953 at a high of 293.8, point 2
• The Dragon year ended with the close of 283.1, which was a gain of 3.6% for the year
• We also have on-balance volume (OBV) data available for this period even though Joe Granville had not yet come up with the concept. The OBV broke out through resistance, line a, in May 1953, signaling stocks’ strong surge
• The OBV showed a strong uptrend through the middle of 1953, line b
• The Dow Industrials peaked in early 1953 at 293.8 and had declined to 283.1 at the end of the Dragon year
• Stocks remained weak for most of the year, eventually dropping to a low in September at 259.70

The Wood Dragon ran from February 13, 1964 through February 1, 1965. As the chart indicates, this was a very strong period for the stock market.

• The Dow Industrials started the year off at 794.60 and ended the Dragon year on February 5, 1965 at 901.6. This was a gain of 19.5%
• The weekly chart shows a very solid uptrend with a series of higher highs and higher lows
• The on-balance volume was acting very strong at the beginning of the period and shows a very solid uptrend, line c, through 1966
• The Dow continued higher in 1965 reaching a high of 939 in May before plunging to low of 840 in July
• The Dow then resumed its uptrend, hitting a high in February 1966 at 995.10

The year of the Fire Dragon lasted from January 31, 1976 through February 17, 1977 and followed the severe bear market low in 1974.

• As the chart indicates, it was basically a trading range year with the Dow Industrials starting at 975.3, hitting a high of 1026 in September, and finishing the Dragon year at 940.3. This was a decline of 3.6%
• The weekly OBV broke its uptrend, line d, in August, and failed to confirm the September highs

The Chinese New Year is symbolized by a new animal from the zodiac calendar, determined in a 12-year cycle. Last year, for example, was the Year of the Rabbit and 2010 was the Year of the Tiger.

Since the start of the S&P 500 index in 1928, dragon years have been significantly strong for both the Dow Jones Industrial Average and S&P 500, with a yearly average gain of 9.65 percent and 7.34 percent, respectively.

Within the Chinese zodiac, the year of the dragon ranks as the sixth strongest year for the Dow [.DJI  12734.63    -22.33  (-0.17%)   ] industrials and fifth best for the S&P 500.

Historically, U.S. markets appear to perform the best in the Years of the Pig — most recently celebrated in 2007, when the S&P 500 reached an all-time high — and fare the worst in the Year of the Snake, last observed in 2001.

Below are the average percentage changes for the Dow industrials and S&P 500 [.SPX  1318.43    -7.62  (-0.57%)   ] according to the Chinese calendar dating back to 1928. Pigs and tigers rule, while snake years tend to be the worst of all.

• Best Chinese New Year for the S&P: 1935, when it jumped 58 percent.  It was the Year of the Pig.
• Best Chinese New Year for the Dow Industrial Average: 1933, when it soared 71 percent — it was the Year of the Rooster.
• Worst Chinese Year for the Dow Industrials and S&P 500: 1931, when both indices lost 53 percent and 49 percent, respectively. It was the Year of the Sheep.