As January Goes, So Goes The Market

Confessions Of A Money Manager: As January Goes, So Goes The Market

By Ray Unger | 2 February 2010

Technicians who track the historical minutiae of the stock market tell us that the first five days of January are pivotal, but also that the whole month is also important. This year, the signals are mixed. My old friend Dick W. Perkins, founder of Wayzata, Minn.,-based Perkins Capital Management, publishes a quarterly newsletter with his sons Dick C. and Dan, and their latest edition features the January Barometer.

The barometer consists of two parts: the first five trading days of January and the month as a whole. In the first five days, the Standard & Poor's 500 rose 2.7 percent and that upward strength carried over until Jan. 19 when the S&P closed at 1,150.23. Then the roof fell in. The broad index sunk 5.1 percent last week and it hasn't fully recovered since. As of now, the S&P is below the Dec. 31 close of 1,115.10. Unless there's a strong rally after this writing, the second part of the January barometer will be negative.[[There wasn't and it was.: normxxx]]

What Now?

According to Perkins, the first five trading days of the new year foreshadow the month of January, and likewise, foretell how the year will turn out. When the January Barometer is positive, according to Perkins' historical data, the median return is 10.4 percent. When the January Barometer is negative, the median historical return has been roughly flat.

Confused?

I'll bet. Especially since last year's barometer was the exception to the rule: last January the S&P lost 8.1 percent, but 2009 turned out to be one of the better years, rising 26.5 percent. Well, given that we're now at the tail end of the Great Recession and that we've just recently concluded the Lost Decade— the worst 10-year performance since the 19th century— confusion should reign. Perkins' quarterly letter also included a comment he attributed to Michael Moe, the founder of Think Equity Partners: "One of the engrained human tendencies is to project the recent past into the future."

The mixed-signal January Barometer seems apropos for this market. It tells us that the post-Great Recession market is still schizophrenic and fearful of another recession. Indeed, this market is reminiscent of the Great Depression that started in 1929 and ended in the late 1930s or early 1940s depending on which history book you read. But for stock market investors, the Great Depression was hardly a straight nosedive for 10 years.

From the peak of 1928 to the low of 1932 (four years), the S&P 500 lost ground each year for a cumulative loss of 64.2 percent. [[Which we managed to condense entirely into a little over one year: normxxx]] In 1933, however, the S&P rallied 53 percent. [[The latter three-quarters of 2009?: normxxx]] In 1934 [[2010?: normxxx]] it slipped a modest 1.4 percent and thus held most of the gain from the previous year. In 1935 and 1936 the rally continued, up 47.7 percent and 33.9 percent, respectively. In 1937 the S&P 500 finally corrected from those rebound years and fell 35 percent.

But it rallied again in 1938, up 31 percent, and closed 1939 with a whimper— virtually unchanged. For those that got out of the stock market during the 1929 to 1932 stock market drought and said, "I won't get back in until after the market recovers," 1934 would have been that year. Following that 53 percent rally, the market, from 1934 to 1939, was up 65.4 percent.

So flash forward to today. The January Barometer is giving us mixed signals. Maybe the barometer is telling us that 2010 will be like 1934. After a strong rally in 1933 when the S&P jumped 53 percent, it took a breather in 1934 and lost 1.4 percent. We've just had a nice 26.5 percent rebound rally from the end of 2008 until mid-January 2010 and we're still perplexed about the economic recovery.

Sound similar? The chart in Perkins' newsletter, provided by Ned Davis Research, indicates that 2010 could, indeed, be a sideways market. Does that mean 2010 will foreshadow better years ahead like 1934 did?

Interesting question.

Obviously we can't predict the future, but Michael Moe's caution that we shouldn't project the recent past into the future should also be heeded. It actually fits better with historical events, especially the stock market's performance during the Great Depression. So the January Barometer is sending us mixed signals. That's good. We shouldn't get too optimistic when the bull's horns are rising or too pessimistic when the bear's claws are falling. And history also tells us that the next decade will be quite different than the past decade.