Kaeppel's Corner: Why the Last Five Days of January 2011 Matter

Jay Kaeppel, Optionetics.com
January 26, 2011

Check the closing price for the Dow Jones Industrials Average on Monday, January 31st. A close above 11,577.51 would be a good thing and close above 11,980.52 would be even better. A vision from within my crystal ball? Nah, that thing broke a long time ago (and sadly, I kept looking into it for a long time before I realized it didn’t actually work). No, these values are not arrived at by looking forward, but rather, by looking back.

The January Barometer – the theory that states that “as January goes (for the stock market), so goes the year” – was first popularized by Yale Hirsch back in the early 1970’s. Much analysis has been done since then and much has been written on the topic. In fact, in my own book – Seasonal Stock Market Trends - I devoted an entire chapter (cleverly titled “The Month of January”) to the implications of stock market behavior during, well, the month of January. This week, let’s take a quick review.

The JayNewary Barometer

I developed a simple model that measured the “strength” of the stock market’s performance during key periods within the month of January. I refer to this model as The JayNewary Barometer (my name is "Jay", the model was "New", OK it was late, what can I say?), or JB for short. Anyway, there are three key periods to measure:

-The First Five Trading Days of January: If the Dow Jones Industrial Average shows a net gain over the first five days of January, the model gets one point.

-The Last Five Trading Days of January: If the Dow Jones Industrial Average shows a net gain over the last five days of January, the model gets one point.

-The Month of January as a Whole – If the Dow Jones Industrial Average shows a net gain between December 31st of last year and January 31st of this year, the model gets one point.

The JayNewary Barometer is calculated at the close on the last trading day of January and can show a reading of 0, +1, +2 or +3. The theory is that higher JB readings suggest a more bullish outlook for the stock market between January 31st and the end of the year. Does it really make any difference? Let’s take a look.

The “Ground Rules”

For the following tests:

-We measure the performance of the Dow Jones Industrials Average between January 31st of each year and the end of that same year eleven months later, depending on the reading of the JayNewary Barometer.

-The test period is 12/31/1933 through today.

-The performance of the stock market during the month of January is ignored completely and no interest is assumed to be earned while out of the stock market.

JayNewary Barometer Readings of 0

Figure 1 displays the growth of $1,000 invested in the Dow Industrials between January 31st and December 31st only during those years when the JayNewary Barometer registered a reading of 0.

Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of 0 (Dec 1933 - Dec 2010)

As you can see in Figure 1, prior to the strong rally in 2009, JB readings of 0 had previously been quite ominous for the stock market. Overall, $1,000 invested only when the JB showed a reading of 0 declined to $697, or -30.3% since 1933.

JayNewary Barometer Readings of +1

Figure 2 displays the growth of $1,000 invested in the Dow Industrials between January 31st and December 31st only during those years when the JayNewary Barometer registered a reading of +1.

Figure 2 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of +1 (Dec 1933 - Dec 2010)

As you can see in Figure 2, stock market performance following JB readings of +1 has been very much a hit or miss affair. If you take out the very first +1 reading in 1935, the stock market has essentially been unchanged between January and December of years accompanied by a JB reading of +1. For the record, $1,000 invested only following JB reading of +1 grew to $1,471, or +47.1% since 1933. Only a 3.8% advance has occurred since the end of 1935.

JayNewary Barometer Readings of +2

Figure 3 displays the growth of $1,000 invested in the Dow Industrials between January 31st and December 31st only during those years when the JayNewary Barometer registered a reading of +2.

Figure 3 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of +2 (Dec 1933 - Dec 2010)

As you can see in Figure 3, the stock market has showed a much greater propensity to rise following JB readings of +2 than following reading of 0 or + 1. Since 1933 $1,000 invested in the Dow only following a JB reading of +2 has grown to $4,675, or 367.5%.

JayNewary Barometer Readings of +3

Figure 4 displays the growth of $1,000 invested in the Dow Industrials between January 31st and December 31st only during those years when the JayNewary Barometer registered a reading of +3.

Figure 4 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of +3 (Dec 1933 - Dec 2010)

As you can see in Figure 4, a +3 reading for the JayNewary Barometer has tended to have some fairly consistently bullish implications for the stock market for the rest of the year. Since 1933 $1,000 invested in the Dow only following a JB reading of +3 has grown to $13,631, or 1,263.1%. Interestingly, the stock market performed better during the +3 years than during all other years combined.

Unfavorable versus Favorable Periods

Let’s go one step further and compare the stock market’s performance during all years that register a JB reading of 0 or +1, to the performance during all years registering a JB reading of +2 or +3.

Figure 5 displays the growth of $1,000 invested in the Dow Industrials between January and December only during those years that witnessed an “unfavorable” JB reading of 0 or +1.

Figure 5 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of 0 or +1 (Dec 1933 - Dec 2010)

Despite a strong “0” year in 2009 and a strong “+1” year in 2010, if an investor had been in the market only during all 0 and +1 years, an initial $1,000 investment in 1933 would now be worth a whopping $1,009 dollars.

Figure 6 displays the growth of $1,000 invested in the Dow Industrials between January and December only during those years that witnessed a “favorable” JB reading of +2 or +3.

Figure 6 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of +2 or +3 (Dec 1933 - Dec 2010)

If an investor had been in the market only during these periods, an initial $1,000 invested would now be worth $63,726, or + 6,273% (remember this assumes being out of the market during the month of January and that no interest was earned while out of the market).

So to put this as succinctly as possible, the raw returns since 1993:

-Following JayNewary Barometer Readings of 0 or +1 = +0.9%

-Following JayNewary Barometer Readings of 2 or +3 = +6,273%

Summary

As this is written, the Dow already registered a gain during the first five trading days of January 2011 and is up roughly 400 points for the month as a whole. So barring a massive selloff between now and the end of the month (and more specifically a Dow close below 11,577.51), we will register a JayNewary Barometer reading of at least +2. If the Dow closes above 11,980.52 we will register an even more favorable reading of +3.

For the record, there have been 46 years since 1933 that have witnessed a JB reading of +2 or higher. 42 times – or 91.3% of the time – the Dow subsequently registered a gain between January 31st of that year and the end of the year.

Here’s hoping history will repeat itself once again.

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

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