The Chill of January's Crystal Ball
Personally, I think stocks went up this week to reward manny for being a good sport and switching from short to a long portfolio. Thanks for doing that manny!
;-)
Doc
Slow Month Could Be Harbinger, But Weak December Brings Hope; Talking Bonds at the Ski Lift
By E.S. BROWNING Staff Reporter of THE WALL STREET JOURNAL
January 3, 2006;
Page C1
As goes January, so goes the year. That is making some investors nervous.
The problem is that the stock market is in the doldrums again. The current period -- December and January -- is supposed to be the strongest of the year for stocks. But December was weak, and the fear is that if the market stays weak in January, it could portend another miserable year for the major indexes.
Last year, for example, the Dow industrials fell 1.7% in first five days of January and were down 2.7% for the full month. The rest of the year was mostly like water torture.
The historical experience suggests that investors have reason to worry -- but also reason to relax a bit.
First, the reason to relax: A weak end to December often means good news for January. In the past, January has been stronger after the Dow industrials fell in the last five days of December than after it rose on those days. Since 1900, the blue-chip average has risen in January 76% of the time after slumping at the end of December. But after rising at the end of December, the index has followed with a January gain only 60% of the time, according to a study done for The Wall Street Journal by Ned Davis Research.
But January had better be good, because, unlike the end of December, the start of the year is a strong predictor of what follows. When January's first five days have been down -- again, going back to the start of the last century -- the chance of an above-average finish to the year was just 43%. If the first five days were up, the chance of an above-average finish rose to 55%.
The full month of January is an even stronger indicator. If January is up, the next 11 months show an average gain of 7.5%, more than the 6.1% average for that period. If January is down, the average performance for the rest of the year is just 3.74%. A January gain leads to an above-average rest of the year 61% of the time. After a January decline, the rest of the year is above average only 34% of the time.
Right now, the mood on Wall Street is grumpy, because investors got coal in their year-end stockings. The Dow industrials fell 1.6% in the last five days of the year, erasing the year's gains. The decline left them down 0.8% for December and 0.6% for 2005 -- the smallest annual percentage move in either direction in nearly eight decades.
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