The first few days and weeks of the year might seem like an arbitrary block of time, but as far as history goes, they’re INCREDIBLY predictive for the rest of the year.
And you may realize the market closed out 2013 with some of the most bullish extremes in market history.
The question is, “Will the extremes lead to a lower market?”
It’s definitely too early to tell, but if you follow the Stock Trader’s Almanac “First Five Days” indicator and “January Barometer,” you will want to pay close attention how the market fares during the first month of the year.
According to the Almanac, “the last 40 First Five Days that were higher were followed by full-year gains 34 times for an 85.0% accuracy ratio.” I know, it seems too simple to believe, but the historical facts and figures are what they are…statistics don’t lie.
Last year, the S&P 500 index jumped 2.2% in the first five days and soared to a 29.6% for the year.
At the time of this writing, the “First Five Days” look to close lower. This will be the first time since 2008 that the first five trading days of the year closed lower. The return that year…-38.5%. And if we go back to 2000, there have been five lower first five days with all but one leading to negative returns. The average decline was -21.3%.
But the “First Five Days” is an addendum to the well-known and closely followed “January Barometer.”
The January Barometer is even more accurate. The January Barometer basically states that as the S&P 500 goes in January, so goes the year. Over the past 64 years (1950-2013), a positive return in January led to a positive annual return 92.5% of the time. A negative return in January predicted a lower annual return 54.2%. Basically, a coin flip.
But I dug a little deeper into the numbers and discovered some very interesting and potentially useful results.
Over the past 64 years, when the first five trading days of the year showed negative returns and the month of January closed lower, the probability of a negative return for the year increased from 54.2% to 73.3% with an average return of 13.9%. Those are odds and returns to which we need to pay close attention, especially given the length of this bullish run and the current bullish extremes in the market.
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