January Almanac: Results from Trio of Indicators Could Reshape 2018
By: Jeffrey A. Hirsch & Christopher Mistal
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December 21, 2017
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January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher. January ranks #1 for NASDAQ (since 1971), but sixth on the S&P 500 and DJIA since 1950. It is the end of the best three-month span and possesses a full docket of indicators and seasonalities.
 
In midterm years, January ranks near the bottom since 1950. Large-caps have been the worst with S&P 500 and Russell 1000 ranking #11 (second worst) and DJIA #10. Technology and small-cap shares fare slightly better in the rankings, but average performance is still negative.
 
[Midterm January Performance Table]
 
DJIA and S&P January rankings had slipped precipitously as the month has suffered some significant losses over the last 18 years. From 2000 to 2016 both indices declined 10 times; three in a row from 2008 to 2010 and again 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively.
 
On pages 106 and 110 of the Stock Trader’s Almanac 2018 we illustrate that the January Effect, where small caps begin to outperform large caps, actually starts in mid-December. Early signs of the January Effect can be seen by comparing iShares Russell 2000 (IWM) to SPDR S&P 500 (SPY) over the past four trading sessions. IWM is up around 2.1% since the close on December 15 compared to a 1.0% gain for SPY. The majority of small-cap outperformance is normally done by mid-February, but strength can last until mid-May when most indices reach a seasonal high.
 
The first indicator to register a reading in January is the Santa Claus Rally. The seven-trading day period begins on the open on December 22 and ends with the close of trading on January 3. Normally, the S&P 500 posts an average gain of 1.3%. The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year.
 
On January 8, our First Five Days “Early Warning” System will be in. In post-presidential election years this indicator has a solid record. In the last 17 midterm election years, just 8 full years followed the direction of the First Five Days. The full-month January Barometer has a midterm-election-year record of 10 of the last 17 full years following January’s direction.
 
Our flagship indicator, the January Barometer created by Yale Hirsch in 1972, simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20.
 
The long-term record has been astounding, an 86.8% accuracy rate, with only nine major errors in 67 years.  Major errors occurred in the secular bear market years of 1966, 1968, 1982, 2001, 2003, 2009, 2010, 2014 and 2016. The market’s position on January 31 will give us a good read on the year to come. When all the Santa Claus Rally, the First Five Days and January Barometer are in agreement, it has been prudent to heed their call. This January Trifecta was absolutely correct in 2017 correctly predicting a full-year, 20-plus percent gain by S&P 500.
 
January (1950-2017)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 6 6 1 7 5
# Up 43 41 30 24 21
# Down 25 27 17 15 18
Average % 0.9   1.0   2.6   0.9   1.4
4-Year Presidential Election Cycle Performance by %
Post-Election 0.7   0.7   2.2   1.6   2.0
Mid-Term -0.9 -1.0 -0.7 -1.3 -0.9
Pre-Election 3.7 3.9 6.6 2.9 3.2
Election -0.01 0.2 1.7 0.1 1.2
Best & Worst January by %
Best 1976 14.4 1987 13.2 1975 16.6 1987 12.7 1985 13.1
Worst 2009 -8.8 2009 -8.6 2008 -9.9 2009 -8.3 2009 -11.2
January Weeks by %
Best 1/9/76 6.1 1/2/09 6.8 1/12/01 9.1 1/2/2009 6.8 1/9/87 7.0
Worst 1/8/16 -6.2 1/8/16 -6.0 1/28/00 -8.2 1/8/16 -6.0 1/8/16 -7.9
January Days by %
Best 1/17/91 4.6 1/3/01 5.0 1/3/01 14.2 1/3/01 5.3 1/21/09 5.3
Worst 1/8/88 -6.9 1/8/88 -6.8 1/2/01 -7.2 1/8/88 -6.1 1/20/09 -7.0
First Trading Day of Expiration Week: 1990-2017
#Up-#Down   17-11   13-15   12-16   11-17   11-17
Streak   D1   D1   D5   D5   D5
Avg %   -0.02   -0.05   -0.04   -0.1   -0.1
Options Expiration Day: 1990-2017
#Up-#Down   17-11   16-12   15-13   16-12   16-12
Streak   U7   U3   U3   U3   U3
Avg %   0.02   0.02   -0.1   -0.01   0.02
Options Expiration Week: 1990-2017
#Up-#Down   14-14   10-18   15-13   10-18   14-14
Streak   D1   D1   D1   D1   D1
Avg %   -0.3   -0.2   -0.02   -0.2   -0.1
Week After Options Expiration: 1990-2017
#Up-#Down   14-14   17-11   15-13   17-11   20-8
Streak   U3   U3   U3   U3   U3
Avg %   -0.4   -0.1   -0.01   -0.1   0.2
January 2018 Bullish Days: Data 1997-2017
  2, 3, 25, 26 10, 17 2, 9, 10, 17 9, 10 9, 10, 17
      26, 29   26, 31
January 2018 Bearish Days: Data 1997-2017
  8, 19, 22, 24 8 16, 19, 22 None 19, 23