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Mark Hulbert
Jan. 11, 2011, 2:00 a.m. EST
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Investors apparently can't resist believing that the market's direction around the beginning of the year possesses special clairvoyance.
This strange superstition manifests in any of a number of ways. One, on which I focused this column a week ago, is the belief that "if Santa should fail to call, bears may come to Broad & Wall." Read my Jan. 4 column.
Another, which began receiving attention over the weekend, is known as the "January First Five Days" indicator "” according to which, the stock market has increased odds of rising for the full calendar year in the event it rises during the first five days of January.
/quotes/comstock/10w!i:dji/delayed DJIA 11,637, -37.31, -0.32%
That would be good news, since the stock market rose during the first five days of this month. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 11,637, -37.31, -0.32%) , for example, rose 0.8% over that period, while the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,270, -1.75, -0.14%) gained 1.1%.
But I'm not so sure. Consider the data I compiled from the Dow's history back to 1896, when it was created.
When the Dow over the first five trading sessions of the year... % of time Dow GAINED thereafter through the end of the year % of time Dow DECLINED thereafter through the end of the year Average Dow gain thereafter through the end of the year Rose 69% 31% 7.0% Fell 58% 42% 6.2% All years regardless 65% 35% 6.7%Think of it this way: Regardless of what the stock market does in the first five days of January, history suggests that there is a 65% chance that the market will rise through year end. The average gain after the first five days, through Dec. 31, is 6.7% across all years. (See the third row of the table.)
Notice how these odds improve only slightly once the market has risen over the first five days of January: Now the odds of an up year are 69%, or just four percentage points higher. And the average gain through the end of the year is 7.0%, or just 0.3 percentage point more.
Not an overwhelming difference, is there? In fact, given volatility in the historical data, these differences are not statistically significant at the 95% confidence level.
These results are probably enough to already persuade us, when forecasting the rest of the year, not to pay more than passing attention to the stock market's returns last week.
But there are a couple of additional interesting patterns to the data that also suggest that the focus on January is little more than superstition.
These additional patterns emerged when I tested the forecasting abilities of the first five trading days of every month, not just January. Interestingly, two months did a lot better than January "” and, in fact, were able to jump over the statistical hurdle created by the 95% confidence level. Those months are April and May.
In other words, if those who attribute special clairvoyance to the first five days of January were truly interested in objectively following the lead of the data, then they would be paying even more attention to a "First Five Days of April" or a "First Five Days of May" indicator.
I'm not holding my breath.
Let me stress that the results presented here do not mean that the stock market must fall this year. Instead, what they mean is that, if the stock market should produce a gain in 2011, it will have nothing to do with how it performed last week.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Add Comment › · Recommend · Post: Alert Email Print More Mark Hulbert Jan. 7, 2011 Debt ceiling and the stock market Jan. 5, 2011 Last year's rankings poor guide to this year Jan. 4, 2011 How recent holiday season stacks up Jan. 3, 2011 The January effect is a small-cap affair Jan. 3, 2011 Who will win the inflation-deflation battle? Explore related topics Dow Jones Industrial Average S&P 500 Index Comments Screener About Mark HulbertMark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
First Take IPhone rush at Verizon may be more gradualWith Apple expected to finally add Verizon as its second U.S. carrier for the iPhone, are expectations getting a bit out of hand?
2:18 p.m. Jan. 10, 2011
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