Popular Stock Market Indicator Calls For February Rally

This January has been more bullish than normal

Senior Quantitative Analyst
Jan 30, 2019 at 7:30 AM
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Stocks are off to a hot start in 2019. The S&P 500 Index (SPX) has gained over 5% with just a couple of days left in January. Based on historical data, it’s important that stocks begin the year on a positive note. According to the January Barometer, the first month of the year is an indicator on how the rest of the year will play out. Below, I run through the numbers that lead people to the theory that January stock returns create momentum that plays out throughout the rest of the year.

Breaking Down The January Barometer

The table below summarizes the S&P 500 return from February through the rest of the year, depending simply on whether January was up or down. In years that January was positive, the index averaged double-digit gains for the rest of the year with over 80% of the returns positive. Compare that to when January was negative. In that case, the rest of the year averaged a gain of just 1.59% with barely 60% of the returns positive.

The chart below lays emphasis on the difference. When January has been positive the index steadily moves higher through the end of the year, other than a lull from about August through October. When the S&P 500 has been negative in January the average path bounces around the breakeven line for most of the year.

sp january barometer 1

sp chart after january 2

Short-Term January Barometer

Maybe you haven’t bought in that one month’s return can affect the outcome for the next 11 months (I’m with you). What about just the next month? Looking at the chart above, you can see the S&P 500 heads in opposite directions right off the bat depending on January’s return. The summarized data below verifies it. January has been a good indicator for the rest of the year, but it has been an even better indicator for just February. When the first month of the year has been positive, February averages a return of more than one percent with about 70% of the returns positive. When January has been negative, the S&P 500 loses more than one percent and not even 40% of the returns positive have been positive.

sp february 3

Bigger Than Usual January

January is not just up this year, it’s up by a large margin, gaining almost 5%. I was curious if the magnitude of January’s performance influenced the January Barometer. Looking at the last 50 years (just as I did above), below is the rest-of-year performance of the S&P 500 based on whether January was up or down by at least 4%. The returns when January was positive by this much are just slightly better than any positive January. When there has been a big negative January, the rest-of-year returns look like any negative January. So, the January Barometer looks about as effective whether January is up by a lot or just a bit.

spx big and small 4

The table below looks at big January returns as a barometer for just February. February averages a bigger gain when January is up by at least 4% compared to any positive January. It averages a bigger loss when January is down big compared to any negative return. Based solely on the January Barometer, you should expect some generous gains in February and for the rest of the year.

big february returns 5

 

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