Indicator of the Week: Does a Bad January Lead to a Rotten Year?

The January Barometer indicates that a tough first month could signal short- and long-term speed bumps for the S&P 500 Index (SPX)

Senior Quantitative Analyst
Jan 27, 2016 at 7:30 AM
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The January Barometer is a well-known seasonality indicator. It refers to the phenomena that, when January stock performance has been strong, the rest of the year has also tended to be strong. When January has been weak, the rest of the year has also been weak. This week I'll quantify those numbers for you, and I'll see if January is a good barometer in the shorter term. Plus, to give us more hope, I'll show how the rest of the year goes when sentiment is very bearish.

January Barometer: The table below summarizes the February-through-December results for the S&P 500 Index (SPX) going back to 1950. You can see why they call it the January Barometer. When the index has been positive in January, the rest of the year easily outperforms, compared to when the SPX is down in January.  

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With the index down 6.9% so far this year, it has been a particularly poor January. I wanted to see if the magnitude of the January return mattered for the rest of the year. The rest-of-year returns after the 10 best January returns aren't all that different from the table above, when January is simply positive. The 10 worst January returns led to rest-of-year results that outperformed, though, compared to January simply being negative. The magnitude doesn’t seem as important as whether the index is simply up or down. 

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Shorter-Term Time Frame: The data above indicates that January has been a good barometer for the rest of the year. But what if you look at a shorter time frame? Is it a good barometer for February?

Below, I broke down February returns on the SPX, just as I did the rest-of-year returns above. Again, January has been a pretty reliable indicator for February. When January was positive, February gained an average of 0.66% and was positive 65% of the time. When the first month was negative, February averaged a loss of 0.88% and was positive just 42% of the time.

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Unlike the rest-of-year returns, the magnitude of the January return seems to mean something for February. The 10 worst January returns led to the SPX losing an average of 1.59% over the next month. February has been positive just 40% of the time after these very poor January returns.

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Investors Intelligence Barometer: Here is a barometer to give us more hope for the rest of the year. Investors Intelligence (II) releases a weekly poll of newsletters and advisors and finds the percentage that are bullish, bearish, or predicting a correction. As contrarians, we believe the more pessimism indicated in the poll, the better the implications for stocks going forward

We have data on the poll going back to 1963. The table below shows the rest-of-year returns (after January) for the SPX when there are more II bears than bulls, and vice versa, as of the last day of January.

When bears outnumber bulls, the S&P does better for the rest of the year, when looking at the average return and percentage of positive returns. The latest poll, released Wednesday, Jan. 20
, showed bears outnumbered the bulls 37.1% to 26.8%. I highly doubt that will change this week, so there's some reason to be hopeful.

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