January Early Warning for Rest of Year

We now know that the first five days of the year were down which became a popular indicator for the year as a whole by Yale Hirsch of Stock Traders Almanac fame. While waiting for the month of January to conclude, I went back and looked at the first five days of every down year since 1951. Then I looked to see if January as a whole was down. Finally, I found all the times where January’s weakness exceeded the prior year’s December low as well as when the entire first quarter’s low was below the prior year’s December low.

The idea behind the research was to see which triggers were common in poor years for the stock market, not necessarily the accuracy in all years.

Listed below are all down years for the S&P 500 since 1951. Here is the key for the abbreviations used.

5 – First five days of the year were down

Jan – January as a whole was down

Dec – January’s weakness undercut the lowest closing price of December

Q – The low of the first quarter exceeded the low of prior fourth quarter’s low

2016 (so far) – 5, Dec

2015 – Jan

2008 – 5, Jan, Dec, Q

2002 – Jan, Dec, Q

2001 – 5, Q

2000 – 5 , Jan, Q

1994 – Q

1990 – Jan, Dec, Q

1981 – 5, Jan, Q

1977 – 5, Jan, Dec, Q

1974 – 5, Jan, Q

1973 – Jan, Q

1969 – 5, Jan, Q

1966 – Jan

1962 – 5, Jan

1960 – 5, Jan

1957 – 5, Jan

1953 – 5, Jan

As you can see, almost every single down year in the S&P 500 saw January as a down month. 1994 and 2001 were the exceptions. That’s pretty remarkable. Of course, that’s not saying that just because January is down the whole year will be down. It just puts us on guard to look for other indicators.

What we also see is that for the more significantly down years, not only is January down, but the low of January and/or the low of the first quarter exceeds the low of the prior December.

2016 has gotten off to the worst five day start in history, but it’s still way too early to say it’s a harbinger of things to come.

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Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

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Early Warning System & January Barometer

With the first five days of January officially in the books, the Early Warning System (EWS) pioneered by Yale Hirsch is flashing a positive sign for the rest of January as well as 2015. The theory says that as go the first five trading days of the new year, so goes January. And as goes January, so goes the year.

With help from my friend Carter Worth of Stern Agee (Carter did the heavy lifting and I peppered him with questions), he examined both the first five days as well as January since 1927. If the EWS was positive, there is a 76% chance that the whole year will be positive. If the EWS was negative, then the year was a 50/50 toss up.  Any random year has a 67% chance of being up. So right now, history says there is a 76% chance of 2015 being an up year.

Those stats alone seem valuable, but they left a big question unanswered for me. If the EWS was positive and then January was positive, how much did January’s return borrow or steal from the full year? Remember, we really don’t know the full results until January 31 and by that time, the stock market could already be substantially higher and potentially cannibalize the full year results.

After continuing to annoy my old friend Carter, we learned that when January is negative, the rest of the year is actually positive by an average of a paltry 1.6%. However, when January is positive, the rest of the year is also positive by an impressive 8.6%.

Although stocks began the year on a sour note, the bulls rose to life over the third, fourth and fifth days of the year to close the first five days marginally higher. As I type this, January is currently down less than 1%. The next three weeks are obviously key for this historical study in determining the outcome of 2015. After watching the Dow reach my longstanding 18,000 target, I am now patiently waiting for five consecutive closes above 18,000 to set the stage for a run to at least 20,000.

My own 2015 Fearless Forecast is being edited now and one thing is for sure, I do not see a repeat of 2014 in any asset class!

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