January Almanac: Three Key Indicators to Watch By: Christopher Mistal & Jeffrey A. Hirsch | December 20, 2016 | Email | Print

 

January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher. January ranks #1 for NASDAQ (since 1971), but sixth on the S&P 500 and DJIA since 1950. It is the end of the best three-month span and possesses a full docket of indicators and seasonalities. 

 

DJIA and S&P January rankings have slipped precipitously as the month has suffered some significant losses over the last 17 years. From 2000 to 2016 both indices declined 10 times; three in a row from 2008 to 2010 and again 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively.

 

On pages 106 and 110 of the Stock Trader’s Almanac 2017 we illustrate that the January Effect, where small caps begin to outperform large caps, actually starts in mid-December. Early signs of the January Effect can be seen by comparing iShares Russell 2000 (IWM) to SPDR S&P 500 (SPY) over the past few trading sessions. IWM is up around 2% since December 14 compared to a 0.2% gain for SPY. The majority of small-cap outperformance is normally done by mid-February, but strength can last until mid-May when most indices reach a seasonal high.

 

The first indicator to register a reading in January is the Santa Claus Rally. The seven-trading day period begins on the open on December 23 and ends with the close of trading on January 4. Normally, the S&P 500 posts an average gain of 1.4%. The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. Last year, there was no Santa Claus Rally and S&P 500 dropped 5.1% in the month of January before bottoming and rebounding in February.

 

On January 9, our First Five Days “Early Warning” System will be in. In post-presidential election years this indicator has a solid record. In the last 16 post-presidential election years 12 full years followed the direction of the First Five Days. The full-month January Barometer has a presidential-election-year record of 13 of the last 16 full years following January’s direction.

 

Our flagship indicator, the January Barometer created by Yale Hirsch in 1972, simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20.

 

The long-term record has been stupendous, an 87.9% accuracy rate, with only eight major errors in 65 years.  Major errors occurred in the secular bear market years of 1966, 1968, 1982, 2001, 2003, 2009, 2010 and 2014. The market’s position on January 31 will give us a good read on the year to come. When all the Santa Claus Rally, the First Five Days and January Barometer are in agreement, it has been prudent to heed their call.