Some observers believe that January stock market returns offer tremendous insight into how the rest of the year will unfold: If there's a gain in the month, the rest of the year looks good. But when the gain is particularly large, the rest of the year looks even better.
That's the conclusion of Donald Dony of the Technical Speculator (via Canaccord Genuity). His numbers suggest that when the S&P 500 has turned in a gain above 3.75 per cent in January, the index has turned in an average gain of 19.6 per cent for the rest of the year. This is good news, given that the S&P 500 is currently up 4 per cent, with about half a day left in the month.
Since 1970, there have been 13 examples when the S&P 500 has risen more than 3.75 per cent in January – and Mr. Dony noted that in all 13 cases the S&P 500 has gone on to bigger and better things.
What's interesting is that this effect hasn't been seen in over a decade. The last time the S&P 500 cleared the 3.75 per cent threshold in January was in 1999. Sure enough, according to my calculations, the index then rose another 14.8 per cent by the end of the year, without factoring in dividends. In 1997, the index rose 6.1 per cent in January, and then posted another 23.4 per cent gain by the end of the year.
Still, before you get too excited about this pattern, keep in mind that the S&P 500 is a mere 0.25 percentage points above the threshold in midday trading on Tuesday – and stocks are looking weak.
David Berman