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Welcome to 2010! No one knows what is in store for this shiny new year. The only thing I’m sure of is that, in a decade, we’ll look back with 2020 hindsight.
Or maybe there is a way to skew the fortunes in our favor. According to Wall Street lore, “As goes January, so goes the rest of the year.” This is also known as the January Barometer: if the month of January provides positive returns, so will the rest of the year and vice versa.
Similar to the end of year or January effect, the January Barometer has been a relatively consistent thorn in the side of the Efficient Market Theory. While it has been observed throughout the lifetime of the US stock markets (going back all the way to 1872, more recent decades have given January a slightly better predictive quality.
As you can see from the detailed data table, going back to 1940, when the performance of January is positive, 73% of the time, so has been the rest of the year. When January’s return is negative, handicapping the rest of the year is not so clear cut.
Of course, in the past 68 years, January has been mostly a positive month for the S&P 500 index: 41 years have been positive and only 27 years negative. The average return for the month is 1.075%, second only to December.
According to market historian John K. Harris, the “barometer seems even more ‘reliable’ following years when the market reached a high in late December.” [as it did in 2009]
In the 82-year history of the S&P 500 index, a year’s high has occurred in December 25 times, says Harris. For the 24 excluding ‘09, 18 were followed by positive Januarys, and the average return for those years was 17.2%. Six of the 24 were followed by negative Januarys, and the average return for those years was -3.5%.
The year’s high has occurred after Christmas 14 times, Harris says. Again, the most recent case is 2009. The prior 13 years that had a post-Christmas high were followed by nine positive Januarys, and the average return for those years was 19.4%. Four of the 13 years were followed by negative Januarys, and the average return for those years was a mere 0.6%.
…evidence indicates that an up/down January is predictive of February-December outperformance/underperformance for the broad U.S. stock market (but not for most other equity markets). However, it may not support an effective market timing strategy as a standalone signal.
More than anything, the January Barometer provides context for the rest of the year. Nothing more and nothing less. Right now we are in the one of the best seasonality time periods of the whole calendar. And with sentiment already at bullish levels last seen in 1987, it may seem incredible to consider that we may melt up even more in the short term.
My hunch is that 2010 will be range-bound, similar to the longer time period that we are currently occupying in market history: Another Decade For the Bear Market. Of course, that doesn’t mean we won’t be presented with fantastic trading opportunities.
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