Stock Market Early Warning System – 85% Reliable

January has been found to have two 85% reliable early warning systems for predicting the year’s market results. The first uses the S&Ps results from January’s first five days and the second uses the S&Ps results from the entire month. With an 85% success record, this seasonal indicator must be taken seriously!

First Five Days

When we look at the last 40 times that the S&P posted gains in the first 5 days of January, the market as a whole posted gains for the year 34 times or 85% of the time. On average, these years generated S&P gains of 14%. We have to look back to 2002 for the last time this indicator gave faulty results. That year the first five days produced 1.1% gains and the market fell 23.4% for the year.

When we look at the 23 years that the S&P fell during the first five trading days of the year, the market finished the year in negative territory less than half of the time.

This year, this indicator seems to be sending the signal for strong gains as the the Standard & Poor’s 500-stock index first five trading days of 2013 produced 2.2% gains. That bodes well for investors. If we see historic average results in 2013, we can expect the DOW to end the year at 14,939 and the S&P 500 to exceed 1,655.

The January Barometer

So, is the quick start in 2013 a sign of more gains to come? According to the Stock Trader’s Almanac’s “January Barometer”, as January goes, so goes the market. Since the 1950s, this indicator has found a 90% correlation between the stock market rising in the first month of the year to the market finishing the year with solid gains.

The January Barometer has been wrong only seven times since 1950. The last time January was wrong was in 2001, when a 3.5% gain in the year’s first month ended up in a 13% market slump by the end of the year.

The stock market ended January 2013 with the Dow Jones Industrial Average up nearly 6%, the best month since October 2011. Therefore the January Barometer supports the First Five day indicator predicting a strong year for the market.

Summary

The theory supporting the early-year gains indicators is that investors typically enter each year with fresh optimism. With a positive outlook, they will pour fresh cash into the market. We would also expect that investors aware of the positive January indicators will be more likely to make larger investments.

Side Note

When the Santa Clause index, the First Five Days index and the January Barometer all report positive gains, it is even a better sign for the year. Unfortunately, the Santa Clause Indicator did not support the two January indicators.