Sunday , 25 September 2022

“January Effect” Predicts A Decline In the Stock Market In 2022

…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…One is known as the January Barometer which indicates that, as the S&P 500 goes in January, so goes the year, and the other is January’s First Five Days Effect.

This article is sponsored by Paul Ventri. Go HERE to sponsor your own.

What Is the January Barometer?

  • 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.

@$$4$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 where it started the year. Put another way, the January barometer didn’t predict a meaningful loss or gain for those eight years. If we eliminate these eight 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.

There have been 29 negative Januaries since 1950 and they have been harbingers of trouble ahead.

  • While 9 resulted in decisively positive returns for the year (meaning returns of better than 5%), in 100% of the down Januaries they were followed by a new or continuing bear market, a 10% correction or a flat year.
  • Down Januaries were also followed by substantial declines sometime later in the same year averaging -13%. This is not good news for advocates of the January effect.

What Is the January’s First Five Days Effect?

  • In 47 out of the last 72 years, during 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.

Unfortunately, the S&P finished the first five trading days of the year down…by 1.9% but, judging by history, it’s tougher to tell what that might mean for the rest of the year, because in the other 25 years where the first five days in January were negative, the results were much less predictable.

  • In 14 of these 25 years the S&P 500 ended with a gain,
  • in 11 of the 25 years it ended the year with a loss.
  • 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.
  • 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 Bottom Line

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.

…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 and, if nothing else, keep your fingers crossed that the market in 2022 defies these two trends and ends the year higher.  

The above version of the original article by Mike Piershale (piershalefinancial.com) was edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

Sponsor an article for $10; Receive a 258-page book as a thank you. Click here

 munKNEE.com has joined eResearch.com to provide you with individual company research articles and specific stock recommendations in addition to munKNEE’s more general informative articles on the economy, the markets, and gold, silver and cannabis investing.
Check out eResearch. If you like what you see then…