January's Returns Predict Rest of Year's Performance 74% of the time

I took the CSI’s Technical Analysis Course a while ago which is mostly based on trying to identify patterns that can be used as predictors for stock market movements. The statistic mentioned in the title, however, did not come from that course. There is no shortage of stats and predictive models out there that people use, ranging from sophisticated computer analyses to blind rules of thumb like, “buy the stock that just fell the most”.

According to Brooke Thackray in his book Thackray’s 2009 Investor’s Guide, between (and including) the years 1950 to 2007, if January’s performance was positive then the REST of the year’s performance tended to be positive, and vice versa. This worked out 74% of the time. (All references in this post are for the S&P 500.)

Note: I highlighted the word REST in both statements. This is because if you include January’s performance in the entire calendar year’s performance you would slightly skew the results and get a higher predictive rate.

Further, it is noted in the book that a positive January was a better predictor for positive performance for the rest of the year (89% accuracy) then negative January performance was a good predictor for negative performance for the rest of the year (48% accuracy). Since the markets have historically spent more time going up than down, this makes sense.

For all you numerologists out there, here’s to a strong January! :)

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 11 comments
  • Mark Wolfinger

    “For all you numerologists out there, here’s to a strong January!”

    Okay. But what about us bears?

    Best regards

  • Patrick

    “if January’s performance was positive then the REST of the year’s performance tended to be positive, and vice versa. This worked out 74% of the time.”

    As a believer in the Efficient-Market hypothesis, I’m going to go out on a limb and say that the market performance from February to December is positive about 74% of the time regardless of January’s performance.

  • Preet

    @Mark: Of course you know I was being facetious! :)

  • Preet

    @Patrick: question for you then. Does EMH preclude seasonal trends from occurring?

  • Jordan

    Hey Preet I’m reading A Random Walk Down Wall Street and I’m curious what’s your belief on the 3 variations of the efficient market theory, do you believe in the weak, semi-strong or strong version? Any insights to the theory? Is it at odds with your Rafi indexes?

  • Daddy Paul

    I am not a fan of trading by the Calendar. In the last 15 years if you sold your mutual fund on Friday and bought them back on Tuesdays close you would be up over twice what you would be buy and hold.
    The market is ready for a slight pullback. Just look back to the 1974-1975 rally. We had a pull back 8 months into the rally.

  • Jordan

    I wonder if anybody has ever back tested a dynamic trading strategy that follows the investor’s almanac. The strategy would be changed annually based on current trends with the highest correlation to past returns. I wonder if it could beat the market, may be due to momentum?

  • Jordan

    Well the numbers are in for January, and the bad news is S&P500 went down -4.65%, S&P/TSX Composite went down -5.55%. Time to pull out of the market completely and invest in high paying GICs, right?

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