The Myth Of The First Trading Week Of The Year

The Myth Of The First Trading Week Of The Year

• Barrons – Do January Returns Bode Well for 2013?

Spoiler alert: The “first five days of January” indicator tells us nothing about how the stock market will perform in 2013. I know that’s disappointing, since the Dow Jones Industrial Average rose 1.7% over the first five days of this year, and the Standard & Poor’s 500 did even better, gaining 2.2%. Wouldn’t it be nice if such gains translated into increased odds of an up market for the rest of the year—as, indeed, many followers of the indicator are now claiming? But hope is not a strategy: There is precious little statistical support for the “first five days of January” indicator. Here’s what I found when I fed into my PC’s statistical software the historical data for the Dow back to 1896, when it was created. Given the variability in the year-by-year results, the differences summarized in the accompanying table are not significant at the 95% confidence level that statisticians often use to conclude that a pattern is more than a fluke.

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We came to much the same conclusion in a study early last year.  Below are the updated tables. The table below shows the historical record of the S&P 500. We defined the first week of the year as the first full trading week in January.

The top panel of the table shows all weeks as a predictor of the following 51 weeks. The bottom panel shows the same indicator using only the first week of every year to predict the following 51 weeks.

Since 1928, if the S&P 500 is up the first week of the year, stocks are higher 51 weeks later 73.47% of the time. While that might sound impressive, the result is similar when using any week of the year. As the top part of the table shows, if the S&P is up on any given week, it is also up 68.85% of the time 51 weeks later.

The results are a bit more interesting when looking at down weeks in stocks. When the S&P 500 is down the first week of January, the next 51 weeks are up just 48.57% of the time. However, on the average down week, stocks are actually up 51 weeks later 65.17% of the time.

In essence, if stocks trade up in the first week in January, the following 51 weeks should not be considered any different than any other up week in stocks and the ensuing 51 weeks. However, a down week in stocks during the first trading week in January is a bit different than, say, a down week in the middle of June. Given the stock market’s performance this past week, this indicator is offering no insight for the rest of the year.

As Goes the Month . . .

The other popular phrase often used by the media is, “as goes the month, so goes the year.” We tested this adage in much the same way as above. We compared January to all months much like we compared the first week of the year to all weeks.

As the top panel of the table shows, January is no more predictive than any other month. If the month of January is up, the market is up 11 months later 79.63% of the time. While this may sound impressive, note that several months have a similar track record. Since an up month projects positive returns 11 months later about 77% of the time, this suggests that the month of January is only slightly better than the average up month at predicting the direction of the market.

The bottom panel shows the results for the 11 months after a given month is down. If the month of January is down, the market is down 11 months later 43.75% of the time. While a down January ranks number two of all months in correctly predicting the direction of the market, it is worse than a coin toss in predicting the direction of the market 11 months later.

Conclusion

In this business all too often many rational people are willing to blindly accept as fact a quote or soundbite without verifying its accuracy. If the first 5 trading days of the year provide positive returns, the performance should not be used to predict the market’s direction 51 weeks later. It is only when stocks are down in the first week of the year that the market acts differently in the ensuing 51 weeks.

Source: Bianco Research