Does January Predict Market Performance?

Articles From: Toggle AI
Website: Toggle AI

Imagine if investing worked like this: you fire up your Bloomberg in the first week of January. You trade some stocks, pull up a few charts, read the news but mostly, you wait for a market indicator that is only published on the fifth trading day. If it’s good, you go max long. The rest of the year, you pull up a few charts, read the news but you don’t trade anymore. By year end, much more often than not, you make money. Read on.

It turns out, there is widespread belief such an indicator does in fact exist: The First 5 Trading Days of January. It’s alarmingly simple. If the market is up after the first five trading days of the year, it’ll end the year up. If it’s down, it won’t be a good year.

Investors are famously superstitious. It’s not unusual to see hedge fund managers wear their “lucky socks” for days on end when the monthly P&L is down. This has left a plethora of mediocre – or downright incorrect – indicators still in use because, well: can you be sure it’s NOT going to work this time?

You can’t, of course but that’s the wrong premise. The working assumption with any indicator should be that it’s garbage unless you have compelling evidence to the contrary.

To be fair, its most recent record has been stellar. It worked in the pandemic 2020 – correctly predicting the upturn – and again in 2021. It then also worked in 2022, this time anticipating the downturn.

Does it stand up to more comprehensive statistical scrutiny?

The " first five days of January" indicator bites the dust

Source: Barron’s

A good article in Barron’s a couple of years ago argued that it does not. The gist? The indicator isn’t any better than guessing. In fact, during the pre-1975 period when – directionally – it was marginally correct, there were other months that had stronger correlation with the full-year market performance. So, even if you liked the concept you’d have to pick a month other than January.

For those very open-minded to esoteric indicators: the planet Mercury entered one of its roughly three-week retrograde periods on December 28. TL; DR the planet appears to be moving backward. Astrologists associate that period with confusion and frustration. This paper argues that doesn’t bode well for stocks, either.

Idea Spotlight – KO:NYSE

TOGGLE observed that equity yield indicators for Danone BN:ENXP reached a recent low and historically, this led to a median increase in Coca Cola price.

Interestingly, a large portion of the insight’s episodes were observed during the Great Recession and given the beverage giant’s defensive characteristics, it could make a reliable investment for potential economic downturns.

Idea Spotlight - KO:NYSE

Originally Posted January 4, 2023 – Does January predict market performance?

Disclosure: Toggle AI

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