Column

Mike Piershale: The stock market's early warning system

Two patterns in January have historically predicted the direction of the stock market for the rest of the year, according to the Stock Trader’s Almanac.

What is known as the January Barometer shows that as the S&P 500 goes in January, so goes the year. If the S&P 500 is up in January for an overwhelming amount of time, it will be a good year for the stock market. And if the S&P 500 is down in January for the overwhelming amount of time, the market won’t do that well for the year. 

This barometer has registered only eight major errors in the past 66 years, which goes all the way back to 1950. This gives it an 87.8 percent accuracy ratio.

There have been 40 up Januaries out of 66 since 1950. Thirty-six of them ended the year with a positive return. This means that over this time period, 90 percent of the time when the S&P 500 is up in January, it ended the year with a positive return.

Down Januaries are harbingers of trouble ahead. There have been 26 of them since 1950. All of these down Januaries were followed by a new or continuing market crash, a 10 percent correction or a flat year, although 12 of them ended the year with a positive gain.

The other pattern to watch is January’s first five days. In 42 of the past 66 years in the first five days of the year, the S&P 500 was up. This was followed by positive gains in 35 of the 42 years. This means that over this time period, 83 percent of the time when the market is up during the first five days of the year, it ended the year with a positive return.

In the 24 years where the first five days in January were negative, the results were much less predictable. There were 13 of these 24 years where the market ended with a positive gain, and 11 of the 24 years ended with a loss.

The average gain across all 24 years was less than 1 percent a year, as compared with the 13.6 percent average gain a year across the 42 periods where the first five days in January were up.

We’re in the first five days in January. It may be worth noting whether the S&P 500 ends up positive or negative for this period.

Historically, if it’s positive, 83 percent of the time in the past 66 years, the market ended up making money for the year. Also, if the entire month of January ends up positive, 90 percent of the time in the past 66 years, the market ended up with a gain for the year.

Keep your fingers crossed for a good January.

• Mike Piershale, ChFC, RFC is president of Piershale Financial Group. If you have financial questions on this column, contact Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You also may email Mike@PiershaleFinancial.com.

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