It could pay to apply close attention to how the market performs this month. The January Barometer refers to the fact that the market’s performance in January is a good indicator for how it’s going to perform the entire rest of the year. Using data since 1950, the table below shows Dow Jones Industrial Average (DJI) returns from February through December, depending on what happens in January. If January is positive, the rest of the year averages a gain of 9.44%, and is positive 83% of the time. This is significantly better than if January is negative. In those instances, the market returns an average of just 2.04%, and is positive just half the time.
If January is particularly strong or weak, the indicator has been even more pronounced. If the Dow is up 3.5% or more in January, the rest of the year averages a gain of 11.15%. If the Dow loses at least 3.5% in January, it averages a gain of just 0.32%.
First Five Days Barometer: We may not have to wait all month to get a decent idea about the rest of the year, though. The table below looks at how the Dow performs depending on just the first five trading days of the year. There has been a little outperformance when the first five days were positive, compared to when they were negative, but it’s not huge.
However, when the first five days have been especially strong, with the Dow up 2% or more, the Dow has averaged a gain of 11.22% for the rest of the year. When the Dow has been down by 2% or more in the first five days, it actually averages a loss of more than 2% for the rest of the year, and is positive less than half the time.
This may be a good omen, as the Dow is up over 2% so far this year, after three trading days.
Presidential Cycle Years: It’d be nice to get a positive vibe from this barometer, as we’re already fighting against the fact that it’s the first year after a presidential election. Keep in mind: historically, these are the worst years for the market, out of a four-year election cycle.
The table below summarizes the returns for the Dow for each presidential cycle year since 1949 (spanning 16 election cycles). The first year has the lowest average return, with only half of those years positive. The theory is that presidents will fight for causes that may hurt the market (which is unpopular) early in the election cycle. That way, they have plenty of time for it to be forgotten or to pass other legislation to counter the previously passed anti-market legislation.
It’d be especially nice if we continue the positive start to 2013. The year after an election has been especially bearish in the first couple of months. Below looks at returns from January through February for each of the election cycle years. The first two months after an election year averages a loss of 1.30%, and is positive just 44% of the time.