Tuesday, January 13, 2009

January Effect

Every year we hear discussion about the so called 'January Effect'. Simply applying the results of the S&P500 in the first month of each year to foreshadow the remainder of the year. The thought is 'as goes January, so goes the year'.

This would make sense as economic policy is often discussed and released early in the new year. Changes to agendas, new directions and more recently - economic stimulus packages - are released to both the press and American public.

Market psychology is also a key component. If 'perception is reality', this pattern may be self-fulfilling to a certain degree. In 2008, investors could have taken shelter after a January haircut of 6.1% led to an annual decrease of 38%.

Since 1972, this barometer has been correct 92% of the time. Pretty remarkable. In post Presidential election years, it has been right 12 of 14 times - an 86% accuracy rating. So, while the expression may have some naysayers, it does seem to have statistical validity.

A more abbreviated version of this phenomena has emerged in recent years and pertains to the first five trading days of the S&P500. This may seem somewhat abbreviated, but the statistics are compelling as well. The last 35 up years for the first five trading days were followed by annual gains in 30 years with annualized returns of 13.7%. This translates to an 85.7% accuracy rating. The five exceptions were 1994 and four years related to war activity.

As the month of January isn't complete, we do not have a figure to look at as of yet. Through January 12, 2009 though, the S&P500 has decreased 3.5%. The first five days trading statistic though was positive 0.7%.

Statistics courtesy of Stock Trader's Almanac

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