Market analysts, prognosticators and soothsayers have been looking at the month of January in an attempt to get a pulse for how the rest of the year will turn out. However, stock exchange traded fund investors should take this January’s performance with a grain of salt.
So goes January, so goes the year, according to the so-called January Barometer.
Over the past 11 times the S&P 500 increased more than 5% over the first month of the year, the overall market returned 24.3% on average, with gains ranging from 45% in 1954 to 2.03% in 1987, writes Jeff Cox for CNBC.
Looking at the January 5-Day Rule – an indication of the bullish or bearish nature for the rest of the year, 2013 could be shaping up for a bullish bias, with some calling for the SPX to end the year at 1,655, writes Billy Williams for Money Morning. The first five day’s performance has successfully called the S&P 500’s direction 33 out of 39 years where the condition was met.
However, while the S&P 500 may have posted gains of 5.3% this January, market observers are wary that the rest of the year won’t fall in line with the typical January barometer.
“We’ve got a lot of excessive bullish sentiment,” Jeff Hirsch, editor in chief at the Stock Trader’s Almanac, said in the CNBC article. “We are running into the typical seasonal behavior, with November, December and January up and the best six months doing well. My feeling is we have another 5 percent or so on the upside and then we will start to weaken.”
Specifically, Hirsch points to technical factors like the new high that have been hard to overcome and fundamental weaknesses in the U.S. and global economy.
Capital Economics also believes that pressure from U.S. corporate and political structures, along with weakness in Europe will leave markets little changed by end of the year.
Meanwhile, most economists expect the U.S. economy to expand 2% or worse this year.
On the other hand, market bulls are pointing to the increased interest in riskier equities. [Stock ETFs Rally as Investors Return to Risky Assets]
“A long-term rotation from bonds to stocks is likely to begin sometime this year, but those claiming that it is already underway are premature and may be in for disappointment if they expect the stock market rally to continue each week in the months ahead,” Jeff Kleintop, chief market strategist at LPL Financial, said in the CNBC article.
J.C. Parets at All Star Charts has an in-depth look at the January Barometer. “When the month of January records a gain, as measured by the S&P500 Index, history suggests that the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an incredible 88.7% accuracy ratio,” he writes. “Unfortunately, history doesn’t speak too favorably for February in terms of seasonality, especially in post-election years.”
- SPDR S&P 500 (NYSEArca: SPY): up 5.1% over the past month
- SPDR Dow Jonew Industrial Average (NYSEArca: DIA): up 6.1% over the past month
- PowerShares QQQ (NasdaqGM: QQQ): up 2.7% over the past month
For more information on the broad markets, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY and QQQ.