Two patterns in January have historically predicted the direction of the stock market for the rest of the year with a high degree of accuracy, according to the Stock Trader’s Almanac.
The January Barometer
What is known as the January barometer shows that as the S&P 500 goes in January, so goes the year.
If the S&P 500 has positive returns in January, the overwhelming amount of time the market will end up with positive returns of 5% or more for the year, and if the S&P 500 has a negative return in January the overwhelming amount of time the market will end up with negative returns of 5% or more for the year.
Going back to 1950 through the end of 2021, the January barometer has registered major errors in only 12 years out of the 72 years in this period. This gives it an 83.33% accuracy rate.
For those 12 years, there were 3 where January was positive and the S&P 500 ended the year negative, and there were 9 years where January was negative and the S&P 500 ended positive.
In 52 of the other 60 years, if January was up, the S&P 500 ended the year decisively positive and if January was down, the S&P ended the year decisively in negative territory.
In the remaining 8 years, the S&P 500 ended the year flat, which means it was less than 5% above or below zero. Put another way, the January barometer didn’t predict a meaningful loss or gain for those 8 years.
If we eliminate these 8 flat years, we would then have the January barometer correctly predicting the direction of the stock market, in 52 out of the last 72 years, which would be a 72.2% accuracy rate.
Negative January‘s Spell Trouble
Negative Januarys have been harbingers of trouble ahead. There have been 29 of them since 1950.
While 9 resulted in decisively positive returns for the year (better than 5%), in 100% of the down Januarys they were followed by a new or continuing bear market, a 10% correction or a flat year.
Down Januarys were also followed by substantial declines sometime later in the same year, averaging -13%.
January‘s First Five Days
The other pattern to watch is January‘s first five days. In 47 out of the last 72 years in the first five trading days of January, the S&P 500 was up. This was then followed by full year gains in 39 of the 47 years.
This means over this time period, 82.98% of the time when the market was up during the first five days of the year, it ended the year with a positive return.
In the other 25 years where the first five days in January were negative, the results were much less predictable. There were 14 of these 25 years where the S&P 500 ended with a positive gain, and 11 of the 25 years ended with a loss.
This means only 44% of the time was the market negative for the year (11 out of 25 years) when the first five days were negative, giving it only a 44% accuracy rate.
The average gain across all 25 years was roughly 1% a year as compared to the 13.7% average gain per year across the 47 periods where the first five days in January were up.
To summarize, since 1950, the direction of the S&P 500 in January, known as the January barometer, has accurately predicted the direction of the stock market for the year 72.2% of the time.
And when the return on the S&P 500 during the first five days of January has been positive, the stock market has had a positive return for the year roughly 83% of the time.
There are certainly pundits that consider these trends to simply be dumb luck almost like voodoo economics. Others take these two trends very seriously.
While I wouldn’t bet my entire 401(k) plan on it, if you think these two January statistical trends are more than just dumb luck, you might consider using this information along with other relevant data in making modest tweaks to your level of stock exposure.
This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer, tax or financial professional. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.