January as a stock market indicator, The Bottom Line & 45 Charts

Posted by Jon & Don Vialoux Timingthemarket.ca

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The Bottom Line
Investors with a time horizon of two months or less will want to take at least some money off the table following extraordinary gains in November and December (particularly in economically sensitive sectors and sectors that are ending their period of seasonal strength). Investors with a time horizon of more than two months should continue to hold positions, particularly if positions are in equity markets and sectors that benefit from favourable seasonal influences into May/August during a U.S. Pre-election year. – A Look at 45 Charts HERE

January as a stock market indicator

The month of January was named after Janus, the Roman god of gates, doors, beginnings, endings and time. He often is depicted as having two heads facing in opposite directions. One head looks back at the last year while the other looks forward to the beginning of the New Year: January. What does Janus predict for equity markets when looking forward in the month of January?

In 1972, Yale Hirsch completed a study claiming that, “As U.S. equity markets go in January, so go equity markets for the remainder of the year”. Analysts have devised many equity indicators like this based on calendar dates. Many of them, such as the “Super Bowl indicator”, are myths, as they merely play on the odds of historical performance repeating on specific days of the year. Correlation with equity market performance can often be sporadic as they are not tied to a causal relationship such as fundamental recurring events. The January indicator, however, has shown to have some merit.

The purest form of the January indicator predicts that equity market gains in the month of January will continue to the end of the year. Conversely, losses in January predict that results for the full year will be negative. A related theory is more specific. It predicts that gains or losses in the first five trading days of the year are sufficient to determine direction of equity markets by year-end. The January indicator is based on the premise that investors will take advantage of depreciated prices caused by tax selling pressures near the end of the year by accumulating positions in January at attractive prices.

Data during the past 60 years for the S&P 500 Index confirms validity of the indicator. Out of the 36 years when January ended with gains, 33 ended with year end gains averaging 19.29 percent. That’s a 92 percent success rate. The remaining three years averaged losses of 9.22 percent. Conversely, the 24 years with losses in January recorded 13 years of negative returns averaging a decline of 14.92 percent. That’s a 54 percent success rate. The remaining 11 years showed gains averaging 8.88 percent.
The effect is equally profound when gains are recorded by the S&P 500 Index in the first five days of January. Gains by year end were recorded in 32 of 37 years with an average gain per period of 17.79 percent. That’s an 86% success rate. The remaining five years averaged losses of 12.38 percent. On the other hand, the 23 years that had negative returns in the first five days of trading recorded 11 losses by year end with an average decline per period of 14.52 percent. The rate of success under this scenario was virtually random at 48%. The remaining 12 years with losses in the first five trading days averaged gains of 13.73 percent by year end.

Results conclude that years that start positively show a greater probability of finishing positively. Outcomes are less significant under the opposite scenario when equity markets start the year on a negative note.

What about this year? The S&P 500 Index after the first five trading days in 2011 showed gains of 1.10 percent. Stay tuned for the close on January 31st as a predictor for 2011.

A Look Don’s analysis of 45 Charts HERE

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca and www.equityclock.com . Follow us on Twitter@EquityClock.