January Indicators Bode Well for Markets

February 1, 2006 (PLANSPONSOR.com) - According to market lore, January has two special attributes. It tends to be a good month. And, good or bad, it tends to predict the rest of the year.

The former – generally referred to as the “January Effect” – has certainly held true.   During the month of January the Russell 2000 was up a blistering 8.91%, while the NASDAQ rose an impressive 4.56%, the Dow Jones Wilshire 5000 was up 3.48%, and the Dow closed up 1.37%.

Perhaps more significantly – at least for purposes of the so-called “January Barometer”, t he S&P 500 ended January 2.55% higher than it began the year (excluding dividends).   According to market “lore”, market analyst Yale Hirsch claims (according to Bloomberg) that from 1938 through 2004 the January direction of the S&P 500 predicted the full-year direction 80.6% of the time – and even setting the month itself aside, Hirsch found that for the 11 months following January, the January direction of the S&P 500 was predictive 73.1% of the time (see http://www.hirschorg.com/jb/ ).  

All that notwithstanding, the past five years, the January Barometer has been wrong no fewer than three times. It falsely predicted an up year in 2001, and incorrectly predicted down years in 2003 and 2005.