As January Goes, So Goes The Year

Traders like rules. Sometimes those rules even mirror reality – hence a maxim develops. Some of my favorite rules-turned-maxims are “the trend is your friend” and “when in doubt, stay out.” More recently, Jim Cramer emphasized a famous adage: “Bulls make money. Bears make money. Pigs get slaughtered.” For a more complete list of market aphorisms, check out this trading resource.

Which brings us to another trader saying – one that is pertinent on this first trading day of February: “As January Goes, So Goes the Year.” With another January in the record books, one wonders if there’s any truth to the notion. It’s especially appropriate since the S&P 500 lost -8.2% last month and we’re facing another potentially difficult year.

As some traders consult mediums and read chicken entrails to determine the direction of the market, other investors are deciding to do things the old-fashioned way. They just look at past performance to determine the future direction of the market. You know, what every investment advisor is forced to admit they CAN’T do, on pain of going out of business. Still, it’s an interesting question. Is it true that “As January Goes, So Goes the Year”?

Last year, Seeking Alpha ran a report of the past 45 years in the market that measured the so-called “January Effect”. According to their research they “found that 71% of the time, the market follows the same path in the February through December period as it does in January.” If you factor in 2008, the accuracy inches up to 73.3%. In other words, if you’re looking to January as a directional indicator for the rest of the year, you’ve got an almost 3-in-4 shot of being right. Granted, the percentage declines when reviewing more years. But that doesn’t negate the market’s most recent history. It seems the January Effect is alive and well.

As the market absorbed yet another confidence blow last month by slipping over 8 points, are we really facing another down year? Our new President seems to think so. “It’s going to take a number of months before we stop falling and then a little bit longer for us to get back on track.” As unemployment is likely to reach 7.5% this month and all eyes are on Washington’s $880 billion stimulus bill to pull us out of our financial mess, I think Obama is right on this issue. Pundits are no longer talking about a recovery this year. What about 2010? Do I hear 2011? Right now, it’s anyone’s guess. It seems the January Effect may work again, much to our dismay.