This has become somewhat of a tradition here on Allstarcharts. Every year as we enter the month of January, I like to go over why this is such a powerful and predictive period. You see, the name January comes from Janus, the God of the Doorway, also known as the God of Beginnings and Transitions. Typically the results from this month reveal a lot about what we should expect going forward. Here’s my list:
The January Barometer – As the S&P500 Goes in January, So Goes The Year. When the month of January records a gain, as measured by the S&P500 Index, history suggests that the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an incredible 89.1% accuracy ratio. This number also includes 2013, as January closed the month up 5% and the S&P500 is on pace to finish very much positive for the year.
Down Januarys Serve as a Warning – According to the Stock Trader’s Almanac, every down January for the S&P500 since 1950, without exception, preceded a new or extended bear market, flat market, or a 10% correction. 12 bear markets began, and ten continued into second years with poor Januarys. When the first month of the year has been down, the rest of the year followed with an average loss of 13.9%. In most years, these declines later provided excellent buying opportunities. For example, 2008 was the worst January on record and preceded the worst bear market since the Great Depression. But 2009 proved to be one of the greatest buying opportunities in American history.
First Five Days in January Indicator – On average, this one has a very good track record. The last 41 UP first five days of the year have been followed by full-year gains 35 times for an 85.3% accuracy ratio. This includes 2013 which had a 2.17% rally in the first 5 days. The average gain for the first 40 of those years was 13.6%. It looks like 2013 will close up nicely and improve that average. The results are less reliable when the first 5 days in January are negative, showing just a 47.8% accuracy rate and an average gain of 0.2%. Going forward, I think it’s important to note that in Midterm Election years, this indicator has a spotty record. According to Jeff Hirsch, of the Stock Traders Almanac, In the last 16 Midterm years only eight years followed the direction of the First Five Days and only two of the last nine (2006, 2010). The January Barometer has a better record in Midterm years.
The January Barometer Portfolio – The Standard & Poors top performing industries in January tend to outperform the S&P500 over the next 12 months. According to Sam Stovall, if on Feb. 1 you invested equally in the 3 sectors that posted the best returns in the month of January and held them until Feb. 1 of the following year, you would’ve received a compound rate of growth of 8% as compared with 6.6% for the S&P 500 (through 2012). If you bought the worst performers in January, you would’ve underperformed the market with a 5.5% return. Since 1970, the compound rate of growth for the 10 best-performing sub-industries based on their January performance was 14.3% as compared with 7.3% for the S&P 500. The best-performing sub-industries in January went on to beat the market in the subsequent months 69% of the time, so nearly 7 out of every 10 years. The worst performing groups outperformed the S&P only 38% of the time. This indicates to us that you’re better off sticking with the winners in January rather than the losers.
The January Effect – As I mentioned on November 25th, this is the tendency for Small-Cap stocks to outperform Large-Caps in the month of January. There are plenty of theories about why this is the case, but as a lot of us already know, this phenomenon now begins in mid-December. The stats don’t lie: from 1953 to 1995, small-caps outperformed large-caps in January 40 out of 43 years. But the shift into the mid-December starting point really got going after the 1987 crash. According to Jeff Hirsch, the majority of the small-cap outperformance is normally done by mid-February, but strength can last until mid-May when most indices reach a seasonal high.
Santa Claus Rally – If Santa Claus Should Fail To Call, Bears May Come To Broad and Wall. That’s the old saying. Nearly every year Santa tends to bring a short rally to the stock market within the last 5 days of the year and the first 2 in January (7 trading days total). Since 1950 the S&P500 has averaged just over a 1.5% gain over this period. Last year, this period returned over 2%. But as the old saying goes, it’s when Santa doesn’t bring home a rally that we should worry. Weakness during this time of year tends to precede bear markets or times where stocks could be purchases later in the year at much lower prices.
As we do every year, we’ll go over all of these again in February to see what sort of conclusions we can come up with based on the results. I hope that I was able to make Janus proud and open the door a little bit into the world of January. The Stock Traders Almanac has very good tools for this sort of data. Sam Stovall from Standard & Poors, who came up with the January Barometer Portfolio theory is also a great source.
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