The Only January Indicator That Matters Is The Present
Wouldn’t it be great if what happens during any single period of time can be relied on to predict the future dependably? Many investors bank on this happening, every year. They can do better.
This is that time of year when market analysts discuss the January Barometer and other “indicators” which are based on the notion that what happens in the month of January sets the tone for what happens in the stock market for rest of the year. And while, sometimes this works, with all due respect to fervent believers of this phenomenon, the market’s action in the first month of the year is at best decent as a predictor of how things will evolve over the ensuing twelve months.
Variety and Confusion
There are three commonly cited January indicators: The January Barometer, The January Effect, and the First Five Days of January Indicator.
The January Barometer should not be confused with the January Effect, which is the notion that stocks which are sold off in December for tax loss purposes will rise in January as investors buy them back. For its part, the January Barometer, states that if stocks end the month of January higher than when the month started, the year will end higher. The converse is also true. Thus, if this premise were to hold, a lower close for January will lead to a lower close for the year. The January Effect was originally described in 1942, while the January Barometer originated in 1972, courtesy of the Stock Trader’s Almanac’s Yale Hirsch.
According to the data, the January Barometer is roughly 85% accurate in predicting the course for stocks, as measured by the S&P 500 Index (SPX), having missed in its prediction of the market’s trend 11 times since 1950. Most recently, the indicator has proven to be mostly useful – accurately predicting the market’s action in 2022 with a 5% decline in January matching a 20% decline for the year. In 2021, although the index fell 1% in January it delivered a 27% gain for the year – so we’ll give them that one. More recently, in 2023, the 6.17% gain in January matched a 25% gain for the year.
Those aren’t bad numbers for sure. And while it would be great to have a bullish end to the month of January, or for that matter on any other month, much remains up in the air about the rest of the year. This year, any prediction is fraught with peril because of the geopolitical issues that remain unsolved – the Middle East, Ukraine, and whatever develops next. When you add the U.S. presidential election, and the potential unpredictability of inflation and its subsequent effect on the Fed’s pause on interest rates – it gets even murkier.
But wait. There’s More.
Then there is the “First Five Days of January” indicator, which stipulates that the action in the first five trading days of the year predicts how the year will end. This one’s been around since 1896, and according to the well-known and respected market researcher Mark Hulbert, it has no statistical significance at all.
In fact, after a second review prompted by his readers after he panned the indicator, Hulbert penned the following: “Upon digging deeper, I not only confirmed that the indicator has no statistical significance, I found that its track record has gone from bad to worse over the years. On average since 1970, in fact, the U.S. stock market actually performed better when the indicator was negative.”
So, instead of forecasting the future, or relying on indicators whose results range from being difficult to interpret to having no “statistical significance,” this article is about trading what you see in the present and how to adjust trading strategies accordingly to what may happen in the future with the understanding that in some cases, keeping a short term trader’s mindset is advisable.
The Big Picture
Despite the market’s stumble in the first trading week of the year, the intermediate and long term trends remain positive as measured by the New York Stock Exchange Advance Decline Line (NYAD). I prefer this indicator to the major indexes because it’s not influenced by the weight of any stock more than any other. That means Apple’s (NSDQ: AAP) or Microsoft’s (NSDQ: MSFT) market capitalization can’t distort its trend.
Moreover, by adding traditional technical indicators, such as moving averages, volatility bands (aka Bollinger Bands), and the RSI (Relative Strength) indicator to the mix, we can gauge important support and resistance levels in the market, as well as the all-important state of oversold/overbought state of the trend.
Currently, although there is plenty of handwringing in the market, NYAD is casting a mostly bullish shadow on the overall price trends. For one thing, NYAD is just below its recent high and seems to be gathering steam. In addition, it’s trading above its 20, 50, and 200-day moving averages, all indicating that the trend remains bullish. Finally, the RSI indicator has worked off some of its overbought status having dropped back to the 60 level, to which the market has responded with a rally. Finally, the CBOE Volatility Index (VIX, upper panel) remains subdued which suggests the options market remains calm.
For its part, the S&P 500 remains in a consolidation pattern. But a lot can happen in twelve months. For example, in 2023, a year which in which the Barometer was correct, the market had a meaningful decline which began in July and ran through November. Notably, the decline cut right through what Wall Street hypes as a bullish trading season, the so called Summer Rally, before bottoming and delivering a barn burning rally to end the year.
As a result, from a trading standpoint, it’s better to focus on what the market is saying in the moment while using the information to formulate actionable trading plans based on how circumstances develop.
A Thoughtful Approach
I review hundreds of price charts on any given day. And from a trading standpoint, there is nothing that, for me, replaces visual price chart analysis. This is especially useful during market declines where most investors are, for lack of a better word, freaking out. To me, it makes more sense to see which groups were the most oversold during a decline, and how they rebound. The biggest losers that find buyers are the places where value has been recognized by the smart money. That’s where I want to be.
I recently highlighted the potential for the 3-D printing sector, via the Ark 3D Printing ETF (PRNT). This ETF’s price chart offers and excellent blue print for the type of investment which could well flourish over the next few weeks to months.
Consider the fact, that just as in the NYAD, above, PRNT remained above its 50 and 200-day moving averages during the early January correction. Moreover, its RSI dropped to 50 and held. That’s a sign that the ETF’s momentum remained in an uptrend and that a resumption of the uptrend is likely.
Another bullish price chart belongs to the iShares U.S. Real Estate ETF (NYSE: IYR). Note that the news about commercial real estate continues to worsen, yet money is steadily moving into this ETF, which is displaying a smaller dip, but one which is being bought just as the one in PRNT.
Bottom Line – Investing is a Full Time Job
It’s tempting to search for the easy path to riches. The truth is that there isn’t one as there is no substitute for hard work and a steadfast commitment to the craft. The long term trend in stocks is impossible to discern. It just unfolds as events develop, things happen and investors act accordingly. Our job is to recognize it and invest with it.
The January Barometer has a somewhat credible record of predicting where the S&P 500 may be at the end of the year; but it doesn’t really address what may happen between January and December. That means that if there is a major decline during the middle of the year, your portfolio will be at risk for losses. The January Effect is difficult to interpret and the First Five Days of January indicator, seems to have been debunked by the credible Mark Hulbert.
In other words, it’s going to be what it’s going to be, which means there is no substitute for being plugged into what’s happening, to devising reasonable strategies for all situations and to adjusting to changing circumstances are required by events.
Perhaps, the best news is that if Hulbert is right, because the first five days of this January were negative, we’re going to have a good end to the year. I’m thinking that would work out just fine.
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