Devised by Yale Hirsch in 1972, the January Barometer has registered eight major errors since 1950 for an 87.9% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the eight major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001.The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. Including the eight flat years yields a .758 batting average.
At this juncture there is not a great deal left to be said about January this year. Following Santa’s “no-show,” January’s First Five Days were the worst on record. DJIA violated its December closing low of 17128.55 on the third trading day and today the January Barometer is officially negative. Our January Indicator Trifecta is negative across the board.
Since 1950, this is only the eighth time that all three indicators were negative and DJIA’s December closing low was violated. Of the previous seven occasions, February was up just twice with an average loss in all seven of 1.9% for S&P 500. However, the next 11 months and full-year S&P 500 was mixed, up four and down three albeit with a negative average performance.
As recently as yesterday’s alert we expressed our concern for the short-term and beyond. The market’s valiant attempt at reclaiming some of this month’s losses the past few sessions is noteworthy, but has been accompanied by some disappointing earnings and economic data. When we released our annual forecast a little over six weeks ago we saw two potential scenarios for 2016. The first agreed with the Fed, commodity rout and resulting deflation are most likely transitory, in which we expected mid-single digit gains for 2016. The second scenario assumed the Fed was wrong and a mild bear market would be the most likely outcome.
Our indicators are suggesting that the Fed is likely wrong and there will be more pain in 2016. Frankly it is too early to say with a great deal of confidence that this is the case. Oil appears to be finding some stability this week and the U.S dollar index appears to be settling into a trading range between 95 and 100. The Fed also appears to have recognized that its previous interest rate tightening schedule may have been too aggressive.
A mild bear market is still on the table at this juncture. What exactly does this mean? We do not anticipate another 2008 style total global meltdown, we envision something more akin to the 1980-1982 bear market that ended the last secular bear market. Back then DJIA shed 27.1% in 622 calendar days (page 132 2016 STA) as the Fed finally got inflation under control and the development of the semiconductor began to accelerate towards the creation of the modern chip-enabled, connected world. This is what we have been looking for since May 13, 2010 when we forecast the next great Super Boom that would lift DJIA to 38820 by 2025.
In the short-term we would expect market volatility to remain elevated as the market wrestles with incoming data and Fed “speak.” Fundamentals are mixed and the technical picture is not great, but DJIA, S&P 500 and NASDAQ have not all violated their respective October 2014 lows, which still leaves the door open to a year like 2005, not a banner year, but still modestly positive.
Despite the pile of negative indicators, and as long as all three major indices do not meaningfully violate their respective October 2014 lows, the scenario of transitory effects remains in play and mid-single-digit full-year 2016 is still the most likely outcome.