New Year’s is the time for resolutions, new diets and goal setting, but it’s also a time when trends in the stock market and exchange traded funds can be set for the coming year.
Here are three January trends to watch for that might predict how the rest of 2011 could go for exchange traded funds and equities markets in general.
- The First Five Days
The First Five Days of January historically have been a reliable indicator of what the coming year will look like. Over nearly 40 years, if the market has been up after the first five days, the year produced gains more than 85% of the time. If the First Five Days are down, the results are less reliable, with about a 50/50% accuracy rate.
- The January Signpost
Since 1950, January has accurately predicted the year’s outcome with a more than 90% accuracy ratio. If the S&P (NYSE:SPY) is up for the full month of January, the rest of the year has usually been up.
- Hot Sectors in January Stay Hot
Since 1970, the top ten industries for January have beaten the S&P 500 more than 75% of the time.
So, do these predictors work?
Clearly it appears that January seasonality establishes patterns for the ensuing year in the U.S. equities markets. Of course, these phenomena don’t have a perfect track record and there have been some colossal failures that investors must keep in mind.
No one knows for sure why these patterns tend to repeat themselves, just like no one knows why there’s usually a “Santa Rally” or why October tends to be the month for major stock market crashes.
Maybe it’s just human psychology at work or maybe it’s because January is a busy time for new beginnings and new annual budgets and priorities for the country and individuals, as well. Or maybe, it’s just chance, although there seems to be more than just “the law of averages” at work in these results.
Whatever the reason, investors are constantly looking for new ways to understand the market and its direction, and these January phenomena offer historical signposts about past January trends and what this January might mean for 2011.
Disclosure: No positions in ETFs or stocks discussed in this article.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.
Improve Your 2011 Financial Health: Join the winning team of stock pickers with Wall St. Cheat Sheet’s acclaimed premium newsletter >>