January 30th, 2010

Dissecting the "January Effect"

I’ve been meaning to do this ever since the first week of the New Year but decided to wait until January ended with a 3.7% decline. What I’m referring to is this thing about “how January goes, so goes the year”.

While the emphasis is logically focused on the first month of the year, the relationship should actually be stated in the inverse. It’s more fun projecting a year out if more fun and makes better copy but the “talking heads” in the media have cause and effect flipped backwards. Over the past century, the market has ended the year up 70% of the time so it is also likely that January will be up and, if January is up, then the there’s a good chance that the first week will be up, too. It’s only if the opposite happens should it make headlines (market down in January but up for the year).

As a matter of fact, someone earlier asked me whether I thought the month of April is positive most of the time because of IRA monies?” I went to the data (the 70 years since 1940) and here’s what I found:

While the market has closed the year up 70.0% of the time over the last 70 years since1940, it has closed up 62.9% of the time in January. As a matter of fact, over shorter periods of time (60, 50, 40, 30 and 20 year intervals), the market has continually closed higher in over 70% of the time during the respective intervals.

But the market has closed up less than 65% of the January’s during each interval. Furthermore, the market has closed up more often in Aprils than they did in January’s during each of those intervals. [Neither would it be correct, however, to say “The way April closes, so closes the year.”]

Those of you who are astute and good with statistics are probably saying, “But would the results be any different when each individual January was matched up with each full year?” And you would be correct, marginally so:

The market declined in January 26 times since 1940 and in 16 of those cases, or 61.5% of those cases the year ended lower than where it began. But the 10 times that January produced a loss, the year still finished higher. Of the 44 times that the market had a positive January, 4 still ended the year with a loss.

The December 31 is a long way off. Is there anything that can be said about February based on January’s performance? One thing that can be said is that February tends to be a worse month than January with 35 or 70, or have being down months with half of those down months occurring after the 26 negative January’s. The 44 positive January’s were followed by down February’s only 18 times or 40% of the time.

So buckle up, we could be in for some more bumpy rides this February.

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  • LC guy

    Very interesting. Thanks for the work you did on this.

  • Anonymous

    Guru,Sy Harding also supports the view of a important low coming this yr in the 3rd quater.Since Gold has had a good run vs Silver,Can you advise what the price of Silver does in midterm election yrs?It has so many applications in industries.

  • Jesse

    guru, I threw this comment about "as Jan. goes, so goes there" at you last week. I think you're right in your assessment. But I think it carries about as much weight as the lunar cycles, the winner of the Superbowl and groundhog day. But it's fun!

  • Anonymous

    Can you sum of your conclusions in 2 or 3 sentences?

  • Joe

    1) No impact on year
    2) February likely down

  • Anonymous

    The IRA was not developed until the mid 1970s.

  • Anonymous

    I'm pretty sure this is due to Seasonal Affective Disorder.

  • Google

    Great news