This is an exciting time of the year. A fresh start after a frustrating 2011 for a lot of market participants. January is powerful month with some predictive powers. Appropriately named after Janus, the God of the Doorway, the results for this period could lead to conclusions about the rest of the year. There is some truth about January as well as some confusion. For example, the January Effect and the January Barometer are two completely different things that many in the media will mix up over the next couple of weeks. Let’s get the year started right by going over some facts about the influential month of January:
The January Barometer states that As the S&P500 Goes In January, So Goes The Year. When the month of January records a gain, as measured by the S&P 500 Index, history suggests the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an amazing 88.5% accuracy ratio. I can’t think of many others that you can say that about.
Down Januarys Serve as a Warning: According to the Stock Traders Alamanc, every down January on the S&P500 since 1950, without exception, preceded a new, or extended bear market, a 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%.
The First Five Days In January Indicator has a nice track record as well. The last 38 UP first five days of the year have been followed by full-year gains 33 times for an 86.8% accuracy ratio. For all 38 of those years, the S&P500 has averaged a 13.9% annual gain. Since 1950, there have been 23 First Five Down Days to kick off the year, but this has much less of a predictive value: 12 up years and 11 down for a 47.8% accuracy ratio and an average gain of 0.2%. Later this year we will have a Presidential election and 13 of the last 15 presidential years followed the first five day’s direction.
The January Barometer Portfolio says that the Standard & Poors top 10 performing industries in January tend to outperform the S&P500 over the next 11 months. Since 1970, the portfolio has an out-performing accuracy ratio of 71%. This indicator has performed even better when the month of January is positive with a portfolio gain of 19.4% for the last 11 months of the year compared to just 12.2% for the index (14.6% to 6.8% normally).
The January Effect is the tendency for Small-cap stocks to out-perform Large-caps in the month of January. There are a lot of theories about why this is the case, but the truth is that the effect now starts in mid-December. From 1953 to 1995, small-caps out-performed 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. This year was no different as the $IWM:$SPY ratio bottomed on December 14th and rallied right away, finishing with a small gain.
January is the NASDAQ’s Top Performing Month over the last 40 years. Since 1971, the total percentage gain for the Nasdaq Composite in January is an unbelievable 115.2%. If you take the rest of the 11 months combined during that period, the rest of the year has averaged just 30.1%. Amazing stuff.
We’ll go over all of these again at the end of the month and see what sort of conclusions we can make 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 and Bespoke Investment Group have 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.
Good luck this year guys!
Tags: $SPY $SPX $ES_F $COMPQ $QQQ $IWM