Daily State Of The Markets: I Like The Odds

Includes: DIA, SPY
by: David Moenning

Good morning. I saw a couple pieces of research yesterday that got my attention. Although we are more than knee-deep into February, both reports focused on how the market has acted historically after a strong start to the year. In short, let me say that while the bears continue to contend that the market is due for a shellacking soon and/or the minute "reality sets in," based on the research I saw, I like the odds for the remainder of the year.

If you follow the market on even a casual basis, I'm fairly sure you've heard about the "January Barometer." The problem is there are many versions of the indicator. However, the granddaddy of them all is "as January goes, so goes the year."

As many authors have pointed out, in reality this time honored cliché isn't much better than a coin flip with regard to how the rest of the year turns out. This is especially true when you recognize that the market itself tends to rise more often than not. For example, since 1950 when January has been up, the market has been up during the rest of the 87% of the time. But, since the market is up from February through December 76% of the time anyway, this doesn't seem to be all that helpful.

Now let's look at what happens when January is down. Over the last 63 years, there have been 24 January's that saw declines. And in those years, the Feb-Dec period was up 13 and down 11. So again, this does not appear to be terribly predictive.

However, where the "January Barometer" gets its good name lies in the returns seen for the rest of the year. You see, when January is an up month, the Feb-Dec period sports an average gain of +11.86% on the S&P 500. This is significantly higher on a percentage basis than the average gain of +7.32% for all Feb-Dec periods. And then when January is down, the average return for the S&P 500 falls to -0.04%.

Based on the data then, I believe it is easy to say that the so-called "January Barometer" is a bit of a push. Like most other stock market indicators, it seems to work well when it works, and then not so much when it doesn't.

But (come on, you knew that was coming, right?) ... The fine analysts at Ned Davis Research have put a new twist on the indicator which I found very interesting. This January, the S&P 500 sported a gain of +5.04%. Thus, NDR checked to see what happened during the Feb-Dec when the S&P rose 5% or more in January.

Since World War II, the S&P 500 has gained at least 5% during the month of January 12 times (the average of these gains was +8.00%). The good news is that the S&P went on to gains during the rest of the year in 10 of the 12 prior occurrences, or 83% of the time. It is also encouraging that the average gain for the Feb-Dec period during those years was +12.49%. This means that the average gain for the calendar years when the S&P 500 was up 5% or more in January was +21.49%. Not bad. Not bad at all.

Before you run out and reactivate your margin account though, there a couple other points to make. First, the two years in which the Feb-Dec periods were losers turned out to be problematic. In 1946, the Feb-Dec period saw a decline of -17.6%. And in 1987, well, we all know what happened there.

In addition, it is worth noting that when January turns out to be a joyride to the upside, the February and March periods are no better than average. This would suggest that the overbought condition created by the strong start to the year took a while to be worked off. But then the Feb-June and Feb-Sept periods turned out to be much stronger than average.

So, while the January Barometer in and of itself may not be terribly predictive, the history of "strong January's" appears to be quite positive. And while the bears continue to point to the fact that the "Sell in May and go away" period is just around the corner, I do like the odds here.

Turning to this morning ... Asian markets followed the U.S. higher overnight, Europe is currently trading mixed, and perhaps the biggest happening so far is the continued dive in gold. Futures for the yellow metal are down another $12 in early trading. Here at home there is a chance that talk of the sequester will crop up again and traders will be looking for any surprises in the latest FOMC minutes.

Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: +0.60%
- Hong Kong: +0.71%
- Japan: +0.84%
- France: -0.18%
- Germany: +0.14%
- Italy: -0.35%
- Spain: -0.47%
- London: +0.30%
Crude Oil Futures: +$0.07 to $96.73
Gold: -$12.00 to $1592.20
Dollar: lower against the yen, higher vs. euro, and pound
10-Year Bond Yield: Currently trading at 2.039%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.39
- Dow Jones Industrial Average: -6
- NASDAQ Composite: -4.86
Thought For The Day ...

"Wide diversification is only required when investors do not understand what they are doing." -- Warren Buffett

Positions in stocks mentioned: none