Indicator of the Week: Will Bulls Break the January Barometer?

SPX's strong January return bodes well for large-cap stocks through year's end

Senior Quantitative Analyst
Feb 1, 2017 at 7:01 AM
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The first month of 2017 is in the books, with the S&P 500 Index (SPX) gaining around 1.8%. The January Barometer is a pretty well-known seasonality indicator, and it tells us we can be pretty optimistic for the rest of the year. Since 1950, when the index was positive for the first month of the year, the next 11 months gained, on average, an additional 12%. Furthermore, 88% of the returns were positive from February through December, when the first month was positive. The returns are not nearly as good when stocks fall in January. In that case, the index averages a gain of just over 1%, with 59% of the returns positive.

Below is a table showing SPX return data from February through December, depending on whether January was positive or negative. The chart accentuates how much better the rest of the year has performed in years when January was positive. Next, I'll look to see if January can be used as a barometer for shorter time frames. And, finally, I'll add a sentiment analysis to the indicator to see if that changes anything.

spx february to december returns jan 31
spx returns after january jan 31

January as a Short-Term Barometer: We know January has been a good indicator for the rest of the year, but what about the next month? How about for the rest of the first half? You can get a sense of this by the chart above. When January was positive, the S&P 500 tended to steadily move higher over the next 11 months. When January was a down month for stocks, February on average declined, then recovered in March only to give back the gains before the year's midpoint. Still, the tables below show the numbers:

spx february returns jan 31

The first table shows how the SPX performed based on the January Barometer. When January was positive, February was positive 65% of the time, gaining 0.66% on average.  When January was negative, the index fell an average of 0.87% in February and was positive just 41% of the time. The second table shows returns through the rest of the first half. It's not even close -- stocks again outperformed when January was positive.

A Lot of Optimism Already: The January Barometer might be cause for optimism, but there is already a lot of optimism for stocks -- at least, according to the Investors Intelligence sentiment survey. The editors at Investors Intelligence gather around 100 published newsletters, and determine the percentage that are bullish, bearish, or expecting a short-term correction. In the latest poll, 58% of the investors were bullish, with only 17.5% bearish. The difference between those numbers is just over 40 percentage points, which is in the 93rd percentile of all readings (we have poll data since 1963). In other words, there is a lot of optimism in stocks right now.

Does this diminish the January Barometer indicator, as our contrarian philosophy might suggest? The table below shows S&P 500 return data in years that January was positive. It breaks down the returns by the average difference in bulls and bears during the first month. You can see the high levels of optimism (when bulls minus bears averages at least 30% in January) has, in fact, had negative implications on the rest-of-year returns. When the difference has been 30% or more, SPX averages a gain of about 5.6% for the rest of the year, with 77% of the returns positive. These returns aren't all that bad, but otherwise, when January is positive, the index averages double-digit percentage gains for the rest of the year, with about 90% of the returns positive.

spx february to december returns bull bear difference jan 31

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