As I have been discussing at length in recent weeks, the month of January can offer a number of clues regarding the future performance of the stock market throughout the remainder of the year. Citing extensive research and trends first revealed by Yale Hirsch and The Stock Trader’s Almanac, in the past two weeks I have discussed the “first five days of January” alert and the “January Barometer.” In doing research for my new book Seasonal Stock Market Trends, I of course felt compelled to include a section on “January” related indicators. I also felt a compulsion to do a little research on my own. So in the course of examining the month of January, lo and behold I came up with another January “predictor.” So let’s take a closer look.  

The Last Five Days of January

One of the things that I looked at in the process of proctologizing the performance of the stock market during the month of January was to consider the performance of the Dow Jones Industrial Average over the last five trading days of the month. As it turns out, the results are worth a look.

The theory is quite simple and is exactly the same as that for the methods developed by Hirsch and The Stock Trader’s Almanac:

• If the stock market registers a net gain during the last five trading days of the year, the rest of the year will be up.
• Conversely, if the last five trading days of January witness a decline in the stock market, then the market should in theory decline between the end of January and the end of February.

Okay, theory is one thing. The real question is, “how does this work in reality?”   

The Results by the Numbers

Let’s look at a few performance figures:

• A “bullish signal” occurs when the last five trading days of January show a net gain.
• A “bullish period” extends from the close on the fifth trading day of January following a bullish signal through December 31st of that year.
• A “bearish signal” occurs when the last five trading days of January show a net loss.
• A “bearish period” extends from the close on the fifth trading day of January following a bearish signal through December 31st of that year.

Using these terms here are some of the important results to note:

• $1,000 invested only during “bullish periods” grew to $42,786 by 12/31/2008.
• $1,000 invested only during “bearish periods” shrank to just $728 by 12/31/2008.
• The annualized rate-of-return during bullish periods since 1944 was +11.5%.
• The annualized rate-of-return during bearish periods since 1944 was (-0.1%).

If the last five trading days of January are UP:

• # of times the last five days are UP: 40
• # of times the rest of the year is UP if the last five days are UP: 33 (83%)
• # of times the rest of the year is DOWN if the last five days are UP: 7 (17%)
• Average gain for rest of year if the last five days are UP: +11.5%
• Average gain for rest of year if last five days are DOWN: (-0.1%).

Up Last Five Days of January versus Down Last Five Days of January: The Rest of the Year

To fully appreciate the difference in stock market performance between those times that the last five trading days of the year witnessed a gain versus those times that it witnessed a loss, consider Charts 1 and 2.

• Chart 1 displays the growth of $1,000 invested only between January 31^st and December 31^st only during those years when the last five trading days of January showed a net gain.

Chart 1 – Growth of $1,000 invested in Dow between Jan. 31^st and Dec. 31^st if Last 5 Days of January UP (since 1944)

• Chart 2 displays the growth of $1,000 invested only between January 31^st and December 31^st only during those years when the last five trading days of January showed a net loss.

Chart 2 – Growth of $1,000 invested in Dow between Jan. 31^st and Dec 31^st. if Last 5 Days of January DOWN since 1944

Now like just about all things related to the market, this method is far from perfect. A closer look at Chart 1 will reveal some serious declines in equity along the way during supposed “bullish” periods. Likewise, a closer look at Chart 2 reveals some meaningful market advances during supposed “bearish” periods. Nevertheless, please note that no on eis suggesting that you use this one simple measure as a basis for all of your investing.

The bottom line from the graphs in Charts 1 and 2 is that if you had to choose between investing only during years when the last five days of January show a gain versus those years when the last five days show a loss, the up years win in a landslide. The $1,000 invested only during the “Last 5 Up” years would have grown to $42,786 by the end of 2008. Conversely, $1,000 invested only during the “Last 5 Down” years would have shrunk to just $728 by the end of 2008.

Summary

As with the other “January related indicators”, one can argue the merits of “the last five days of January” method of analysis. If anyone has an obvious and solidly logical explanation as to why a bullish first five days, or last five days or the month as a whole should be followed by a further gain I would love to hear it. Still, the numbers are what they are.

Based on the evidence above, if the last five trading days of January show a gain, investors should consider giving the bullish case the benefit of the doubt through the end of the year. Conversely, if the last five trading days of January show a net loss, investors should remain cautious.

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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site