This is typically a slow, yet very exciting time of the year for us. A fresh start in 2013 to show this market what we’re made of. Coming up in a few days starts the month of January, a very powerful and predictive period. Appropriately named after Janus, the God of the Doorway, the results for this month could lead to conclusions about the rest of the year. There is definitely some validity to January’s effects as well as some confusion. For example, the January Barometer and the January Effect are two completely different things. I’d bet that plenty will get this one wrong over the next few weeks. So let’s get right into it, and let me explain what the month of January means to me:
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 88.7% accuracy ratio. This number also includes 2012, as January closed the month up 4.35% and the S&P500 is on pace to finish 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 – This one has a very nice track record as well. The last 40 UP first five days of the year have been followed by full-year gains 34 times for an 85% accuracy ratio. This includes 2012 which had a 1.8% rally in the first 5 days. The average gain for the first 39 of those years was 13.6%. It looks like 2012 will close up somewhere right around that number as well. 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 the S&P500 posted a gain for the first 5 days of the year in just 6 of the last 15 Post-Election 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. 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 14.4% as compared with 6.8% for the S&P 500, and 4% for the worst 10 sub-industries in the S&P 500 in that January. 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 rather than the losers.
The January Effect – As we mentioned in our December 6th Post, “It’s Game Time for Small-Caps”, there is a 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. This year, however, the Russell2000 actually began outperforming the Larger-Cap Russell1000 in mid-November. So the results here should be interesting to look back on.
January is the NASDAQ’s Top Performing Month – 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% (1971-2011). 2012 was no different as the Nasdaq Composite gained 8% for the month of January and is up just about 6.6% since then.
As we did last year, we’ll go over all of these again at the beginning of February and see what sort of conclusions we can make based on the results. I always like to make Janus proud and open the door a little bit into the world of January. As a God who looks both ways, some would say that this is a reminder to all of us that we must focus our attention, not just on the long side, but on the short side of the market as well. Markets move both up AND down. So rather that focusing our attention on why a given market may be in decline, let us remember that the markets have ALWAYS gone in both directions and this is perfectly normal behavior. In 2013, let’s make a conscious effort to anticipate market corrections and benefit from them, as opposed to looking for people to blame. Let’s take responsibility for our portfolios and have a killer year!
Best of luck in 2013
*Make sure to check out the Stock Trader’s Almanac, Bespoke Investment Group and Standard & Poors, who I believe provide some of the best data and tools for the above mentioned stats.