Worst S&P 500 Start Ever, First Five Days Early Warning, January Barometer Crucial This Year
By: Jeffrey A. Hirsch & Christopher Mistal
January 08, 2016
First there was no Santa Claus Rally (SCR), and then December’s Closing Low of 17128.55 was violated on January 6 and now the First Five Days (FFD) early warning indicator has registered its worst reading on record going back to 1930 (S&P 500 –6.0%). The first five days of 2016 were capped by a 1.1% S&P 500 drop despite a solid December employment report that showed the economy added 292,000 jobs last month. The market is definitely on shaky ground and the risk of further downside is growing. 
However, ample time remains for the market to rebound and finish January with a gain. A positive January Barometer reading would go a long way to improving full-year prospects. And given the recent tendency for the market to rebound just as sharply as it sells off, the possibility of a positive January is not all that far-fetched.
Of the 28 negative S&P 500 FFDs since 1930, the full year was down 15 times and up 13 times. The worst annual loss was 2008, S&P 500 off 38.5%. The best year is nearly a four-way tie with 1955, 1985, 1991 and 1998 all registering full-year gains of over 26 %.
In presidential election years this indicator has a solid record. In the last 16 presidential election years 14 full years followed the direction of the FFD. Errors occurred in 1956 and 1988 when the FFD was negative and the full year finished positive. 
The current combination of a negative SCR, negative FFD and DJIA December Low violation has occurred nine times since 1950 (shaded in grey in table below), excluding this year. January was down in seven of those previous nine. But, the Last 11 Months and Full Year were up in six of those nine years. Losing years were all bear markets and included 1969, 2000 and 2008.
No single indicator is perfect and even the January Trifecta plus the December Low indicator has given a few false negative readings. All the negative readings thus far are a cause for serious concern, but if the market can hold last year’s August low and stage a January rally the outlook for 2016 would improve. The official January Barometer (JB) on the 29th is even more significant this year. A positive reading could signal fears and concerns regarding China and global growth were overblown while a negative JB would add credibility.
[S&P 500 January Early Indicator Trifecta Table]