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by Matthew Carr, Investment U Senior Analyst
New York, Jan.18, trading stocks .- Can we know where the market is headed before the year even gets underway?
That's always the question, isn't it?
At the start of the year, there're all kinds of predictions about where the market is going to head. All the big, bold predictions come out. And we'll see articles that discuss indicators like "Where January goes, the market follows..."
But that's hogwash.
If we look at the S&P 500's returns going back to 2000, this January trend buckles.
For example, since 2000, January has yielded negative returns for the S&P seven out of 13 years... January is the start of earnings season, and it's typically volatile because of that.
But during that same span, the S&P itself has had negative full-year returns only four times... Three of those when the month of January ended in the red.
To summarize, looking at the entire month of January is a misdirected indicator for how the market will do the rest of the year.
Finding a More Dependable Indicator
But there's another January trend indicator that's a lot more successful. And it looks at a much smaller period of time... just five trading days.
The "first five days of January" indicator was the brainchild of Yale Hirsch back in the early 1970s. It was hailed as an early warning system.
The idea is fairly straightforward: Those first five days give you a barometer of investor sentiment. And this can show you where the market is likely heading over the next year.
Admittedly, I've been intrigued by this indicator...
But instead of just blindly following "If the first five days of January are positive, then the rest of the year will be positive, too..." I've found you get a clearer picture if you only look at two thresholds. The rest are sort of neutral - akin to a shoulder shrug.
If we just look at a small sample going back to 2000, we can see it's fairly accurate.
When the first five trading days in January on the S&P 500 yielded a gain of 1.73% or higher, the S&P returned double-digit gains for the year four out of five times. The fifth was a return of 8.99%.
Year
|
First Five Days of January Return
|
Full-Year Return
|
2012
|
1.73%
|
13.29%
|
2010
|
2.55%
|
12.64%
|
2006
|
3.35%
|
13.62%
|
2004
|
1.80%
|
8.99%
|
2003
|
3.42%
|
26.38%
|
Year
|
First Five Days of January Return
|
Full-Year Return
|
2008
|
-5.30%
|
-38.47%
|
2005
|
-2.12%
|
3.00%
|
2001
|
-1.85%
|
-13.04%
|
2000
|
-1.89%
|
-10.14%
|
Now, on the other hand, if those first five days return a loss of -1.8% or larger, the S&P ended the year with a double-digit loss three out of four times.
The S&P has returned full-year double-digit losses four times in the last 13 years. And this indicator predicted it right three of those times.
So, this year, the S&P returned a gain of 2.17% during the first five trading days. Going all the way back to 1950, if the first five trading days of January returned a gain of 2% or more, the market ended the year positive. Better yet, only twice did it not result in double-digit returns...
One more reason to be bullish on stocks in 2013. ...
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