What is the Chinese Zodiac Stock Indicator Forecasting for 2011?

The Chinese Lunar New Year began last week on February 3rd and will end on January 22, 2012, with this year’s Lunar New Year celebration culminating with the full moon on February 18th.

2011 is officially known as the Year of the Golden Rabbit and comes from the rabbit, the fourth sign of the Chinese Zodiac and is known generally to be a lucky sign.

Rabbit years tend to be good years and the Chinese Zodiac is taken so seriously across Asia that one of their leading brokerages, CLSA (Credit Lyonnais Securities Asia) publishes a yearly feng shui index focusing on the Chinese Zodiac and its stock market forecasts.  This is serious business in Asia, so serious, in fact, that many people look to the Chinese Zodiac as a stock market forecaster and consider it to be a reliable predictor of the future.

This year marks the 17th annual report and overall says that 2011 will be a positive year for global equities markets but with ups and downs, “bunny hops,” along the way.  Moving like a rabbit, the markets will be cautious and look for predators, darting back and forth but ending on a positive note for the year.

Looking back at the last five Rabbit Years, four were up years for the market with the one exception being 1987 and its infamous crash of “Black Monday” that delivered a stunning one day loss of nearly 22% on the Dow Jones Industrials (NYSE:DIA).

Month by month, according to CLSA, this Rabbit Year shows a decline in February and March, choppy through June with a summer rally, a September-October pullback and a strong finish into year end. (all market moves are centered on the Hang Seng Index, however, a glance at the Hang Seng compared to the S&P 500 (SPY) shows relatively strong correlations between the two indexes and so this data could also be applied to U.S. indexes, as well, as depicted in the chart below)

According to the “Chinese Zodiac Indicator,” top sectors are forecast to be gold, oil and gas and resources with laggards being financials and property and real estate.

So is this all hocus pocus or is there validity to the “Chinese Zodiac Indicator?”

I wrote about this same report last year which indicated that 2010 was the Year of the Tiger.  Looking back to CLSA’s report for 2010, we see that it forecast, “Tiger years are typically marked by dramatic changes and even upheaval and 2010, much like the tiger itself, sees an energetic and powerful, but impulsive and risky, year ahead.”  But they go on to say that overall the year should be bullish with the strongest part of the year starting in September.  The report also says that the Year of the Tiger will be a good year for metals since the tiger is associated with metal and some people call this the Year of the Metal Tiger.

Sounds like a spot on forecast to me and so we’ll see how they do for the upcoming Year of the Rabbit.

For investors wanting to follow the play with the Year of the Rabbit, the most closely correlated exchange traded fund to the Hang Seng Index is FXI, the iShares FTSE/Xinhua China 25 Index Fund (NYSE:FXI).

In the chart above, we can see that FXI (NYSE:FXI) moves closely with the Hang Seng and so would be a good proxy for investors who want to follow the feng shui of the Chinese Zodiac.

Investors and traders around the world are constantly on the lookout for accurate prognosticators of stock market action and so we have a myriad of technical indicators, fundamental analysis techniques and indicators tied to things like seasonality and even the Super Bowl.  The Chinese Zodiac is widely watched and carefully followed in Asia and with China’s rising stature as a world economic power and financial center, perhaps the zodiac and this year’s “Year of the Rabbit” deserve closer attention.

Whatever your opinion of The Chinese Zodiac Indicator and the Year of the Rabbit, I wish you “Gung Hay Fat Choy” which is a traditional Chinese New Year’s greeting that’s loosely translated as, “Have a prosperous and good year!”

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.

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