Late Month Surge Insufficient to Avoid Negative January Barometer
By: Jeffrey A. Hirsch & Christopher Mistal
January 31, 2022
Even after surging 4.4% in the final two trading days of January, the S&P 500 still finished the full month down 5.3%. This is the eighth worst January since 1930 for the S&P 500. Stretched market valuations combined with the Fed taking away QE and promising to raise rates later this year appear to be two key factors for the market’s selloff this year. Nonetheless, our January Barometer is negative.
Devised by Yale Hirsch in 1972, the January Barometer (JB) has registered 12 major errors since 1950 for an 83.3% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the twelve 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. In 2016, DJIA slipped into an official Ned Davis bear market in January. 2018 was the tenth major error overall as a hawkish Fed, a trade war and slowing global growth concerns resulted in the worst fourth quarter performance by S&P 500 since 2008. Covid-19 impacted 2020 & 2021. Of the 12 major errors, nine have occurred since 2001. Including the eight flat years yields a .722 batting average.
[Trifecta UDD Table]
The near-term outlook for the market has diminished as every down January except 2021 (page 22 Stock Trader’s Almanac 2022) since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year. Using intra-day S&P 500 highs and lows it has already satisfied the 10% threshold of a correction using its high on January 4 and its low on January 24.
This year’s combination of a positive Santa Claus Rally, down First Five Days with a full-month January loss has only occurred nine times (including this year) since 1950. In the previous eight occurrences S&P 500 was up four times in February with an average gain of 0.1%. However, over the remaining 11 months of the year, S&P 500 advanced just 25.0% of the time with an average loss of 5.8%. Full-year performance was positive once with an average loss of 9.4%.
Because we do not rely solely on a single indicator or pattern, DJIA’s December closing low of 34022.04 is still a key level to be watched (2022 STA page 36). All in all, it looks like the market may have found support here in late-January and we anticipate the rally to continue back toward the recent highs by the end of the Best Six Months in April. After that we expect a retest of the current lows and perhaps lower lows in the Worst Six Months of 2022, the weak spot of the 4-Year Cycle, followed by a Q4 rally at the beginning of the sweet spot of the 4-Year Cycle in line with our 2022 Annual Forecast Base Case Scenario with S&P 500 and DJIA finishing 2022 up 5-10% and NASDAQ slightly weaker.