The January Effect is a long-held market axiom that says how the stock market performs in January will indicate how the rest of the year will go. We've previously looked at the "First 6 Weeks" as a stock market performance indicator and found that it has high correlation with yearly gain/loss over the past 30 years (especially for up moves) - in early-2012 that indicator correctly guided us to further gains in that calendar year. Now we looked back at 50 years of the S&P 500 Index (SPX) (SPY) to see how well the January Effect works, and what it indicates is likely for 2013. 50 years covers a wide variety of market environments and data and is a good sample size to look for trends and patterns.
The market got off to a strong start in 2013, with the SPX gaining 5% over the first month - our analysis of the data indicates a high probability that the market will reap further gains over the course of this year.
See the raw data of 50 years of SPX January and Yearly performance below. This shows the year with SPX gain/loss % for January and the full year. When the market made a gain in January it is bolded, and it says "Y" if January was Up and Y or N if the full year was up or down. Also we calculated the multiplier of the gain in January compared to the full year:
Since we had a gain in January 2013, it's prudent to break down the above data by similar year. There were 31 Up Januarys since 1963, and in 27 of the cases (87%) the market ended higher on the year. See the breakdown below. The average January gain was 4.37% and average year gain was 14.67% - this multiplier ratio and the average ratio gives a projected yearly gain for the SPX of between 16.92% and 23.79%.
However, because we had such a large gain in this January, we looked at examples that more closely parallel the start to 2013. In this case, it would be times when the SPX gained 5% or more in January. There have been 12 examples of this in the past and all 12 times the market ended the year higher. The exact years are: 1963, 1967, 1971, 1975, 1976, 1980, 1983, 1985, 1987, 1989, 1991, and 1997. Note that the "Crash" of 1987 is incorporated here, where the market had a huge January gain, but even with an October plummet it ended barely up on the year. Here the multiplier is lower - which is logical given that the market gained a lot in January already - but the average of these years is a 7.58% gain in January and a 21.76% gain on the year. This gives a projected gain for 2013 on the SPX of between 14.46% and 15.74% (which equals a year end 2013 SPX of 1632.41 to 1650.70) - this is a logical and reasonable gain target for the year (a 15% yearly gain is very nice for investors and not outside the norm). We prefer the round 1650 level as the upside target for 2013, as the market is often drawn to the big round numbers on a psychological, technical and open interest basis.
Bottom line is that 50 years of data indicates a nice correlation between a strong January and a strong year for the stock market (DIA) (QQQ) (IWM). 87% of the time an up January has meant an up year - and 100% of the time when the market has gained 5% or more in January, it has ended higher on the year as a whole. Past data indicates the yearly gain will be in the 14% to 24% range, but we've zeroed in around a projected 15% gain and a SPX 1650 target.
Additional disclosure: BigTrends Rapid Options Income subscribers have an open SPY options position.