Sunday, 7 February 2010
As goes January, so goes the year?
One of the most commonly quoted stockmarket axioms is ‘as goes January, so goes the rest of the year’, which refers to January’s supposedly uncanny ability to predict how the market might perform for the next 11 months. So if January is weak then believers in the axiom say the rest of the year will be weak, but if it’s strong then the year will be strong. Since the Straits Times Index (STI) dropped about 5 per cent in January, could this be a portent of a soft year ahead for local stocks?
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As goes January, so goes the year?
By R SIVANITHY
04 February 2010
One of the most commonly quoted stockmarket axioms is ‘as goes January, so goes the rest of the year’, which refers to January’s supposedly uncanny ability to predict how the market might perform for the next 11 months. So if January is weak then believers in the axiom say the rest of the year will be weak, but if it’s strong then the year will be strong. Since the Straits Times Index (STI) dropped about 5 per cent in January, could this be a portent of a soft year ahead for local stocks?
The first thing to note is that there are two ‘January effects’, so it’s important to distinguish between them - the first refers to performance over the first five days of the month and the second to the entire month.
The five-day January effect is loosely based on the tax-loss selling hypothesis, which is that investors who sold stock before the end of the old year to claim a tax loss tend to reinvest that money when trading resumes at the start of the new year. This is the January effect that most practitioners rely on and the one that academics have studied more thoroughly.
According to the Stock Trader’s Almanac, a book that tracks market trends on Wall Street, there have been only five instances since 1950 when this January effect has failed to correctly forecast how the year pans out. So going by this version of the theory this should be a positive year for equities, but only marginally so - the S&P 500 gained 1.05 per cent in the first week of 2010 while the STI’s rise was 2.7 per cent.
Opposite outcome
The second January effect uses the whole month’s movement and suggests the opposite outcome - as noted earlier, the STI fell 5 per cent over the course of the month while the S&P 500 lost 3.7 per cent.
US research house Birinyi Associates looked at data from 1962-2007 and found that 71 per cent of the time, the US market follows the same path in the February-through-December period as it does in January. If this occurs again, 2010 might be a down year for Wall Street.
However, when Birinyi broke the data into up-versus-down years, it found that the indicator is much more reliable predicting market gains following a positive January (86 per cent) than in predicting losses following a down January (47 per cent). So the bulls should draw some comfort from this finding.
The full-month version of the axiom for Singapore was examined by UOB-KayHian in a Feb 2 Singapore Strategy report. The broker used 20 years’ worth of data and found that January’s return correctly predicted the whole year’s return only 13 times or 65 per cent of the time, and thus concluded that using January as a whole-year yardstick may not be useful. Furthermore, OCBC Investment Research in its Feb 2 Market Pulse also expressed scepticism with this version of the effect, correctly pointing out that January 2009 was a terrible month for stocks but 2009 as a whole was one of the best on record.
Of course believers in the whole-month theory might argue that one year does not nullify the theory, but our view is that both January versions should be seen as being statistical anomalies that provide observers, analysts and investors with an interesting intellectual exercise but little else.
‘Super Bowl’ indicator
If you look hard enough, it’s possible to hypothesise meaningless links between market movements and events that bear no logical connection - in the US market, for example, there are some who believe in the ‘Super Bowl’ indicator, which is that if a team from the old American Football League wins the prestigious Super Bowl the stock market will fall that year, but should victory go to a team from the old National Football League the market will rise.
It would be much more advisable for investors to focus their energies on issues that really matter, such as rising interest rates, earnings (while taking note of the low 2009 base effect when presented with glowing earnings growth) and withdrawal of government stimulus sometime later this year.
Our guess is that the relief rally of March-December 2009 has now run its course and will be replaced by more measured trading, probably on the marginal upside. It’s unlikely that equities, having returned more than 60 per cent last year, would be able to repeat that performance in 2010 though a double-digit return in the low teens cannot be ruled out.
Still it’ll certainly be interesting to revisit this theme in a year’s time to see which January version proves more accurate.
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