Time Is Running Out for the January Barometer

We’d better have a rally soon or we’re in trouble … at least according to one key barometer of the markets.

Why am I so nervous so early in the year? Given the facts we have in hand so far in 2016, the historical record provides many clues to the way ahead – and it indicates we’re running out of time.

First consider these facts: The New Year swan dive of more than 1,000 Dow points in the first week of this year marks the worst start of ANY year in history for stocks.

With 2016 just eight trading days old, the Dow and S&P 500 are already down more than 5%, while the Nasdaq has shed 6.7% and the Russell 2000 small cap index has dropped almost 8%.

And it’s not just U.S. stocks, or equities in general, that are getting hit. European shares are plunging, too, with the U.K. FTSE Index down 5.9% while Germany’s DAX Index has lost 6.3% in dollar terms.

It doesn’t get any better in Asia, where Japanese stocks are already down 6.9%, Hong Kong has lost 9% and China’s Shanghai Composite Index has plunged 22.4% year to date. That’s a bear market magnitude decline in just eight days!

And commodity prices continue to plunge as well, with crude oil down another 15% year to date, now trading at 12-year lows.

This leaves investors wondering if the relentless selloff in just about every asset class to start the year will ever stop. And I’ve been hearing plenty of chatter this week about the so-called January Barometer: As goes the first week of January, so goes the month and the year.

Is this indicator telling us this could be just the start of a bear market? Let’s take a closer look at that historical record I mentioned earlier.

Could this be just the start of a bear market?

Based on S&P 500 data going all the way back to 1928, the trend in stocks during the full month of January is a pretty good predictor of the direction stocks will take for the entire year.

May the odds of a rally be ever in your favor …

When stocks move up in January, the stock market goes on to post full-year gains 80% of the time. And the average return of the S&P is 8.6% from February through December, according to data from Merrill Lynch.

But when stocks fall in January, watch out, because the stock market is only up 42% of the time, with stocks declining 1.8% on average for the full year.

The S&P 500 dropped nearly 6% last week, the first five trading days of this year, leading some pundits to claim that the January Barometer has spoken and stocks are doomed in 2016. But a closer look at the historical record says this isn’t necessarily so.

Based on the same S&P data stretching back to 1928, when stocks advance during the first five days of January, stocks go on to end the year positive 74% of the time. However, when stocks are down during the first five days, the chance of an up year is 50/50.

In other words, it’s pretty much a coin toss whether the stock market recovers later this year or not.

So the first-five-days indicator just doesn’t have the same predictive value as the full-month of January.

Still, with the S&P 500 already down over 5%, and with just two weeks and two days left in January, the bulls need to hope for a robust rally.

That’s because if the month ends as badly as it began, the odds of good year for the stock market are not in our favor.

Good investing,

Mike Burnick

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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.