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pay attention to January !!
The "January Barometer", credited to Yale Hirsch in 1972 (Stock Traders Almanac), indicates that "how January goes, so goes the year".
Reviewing the charts for the last 100 or so years, we find that the majority of years began strongly as the flow of new money came quickly into the markets, but 20 Januarys started out with significant declines. Only a couple of the sharp January drops had quick recoveries (1955-1965, for example), which seemed to save the year. Eerily, in most of the years with bad Januarys, the stock market seemed to have some knowledge of a negative event that was to come later in the year.
The following is a list of the years with significant declines in January and what followed that year, including important news events that affected the stock market. Credit goes to "DowTheory Letters" for part of this information from a chart book they published more than 25 years ago.
1907: The spring brought what is infamously known as the "Panic of 1907." A run on the banks brought a market collapse, with the Dow losing 25 percent of its value.
1910: Haley's Comet brings talk of doomsday and the stock market falls hard into mid-summer, losing 18.5 percent.
1913: Taxes! The 16th Amendment coincides with an 18-percent decline into June.
1917: U.S. enters WlNI, and the market declines big all year - Dow down 37 percent.
1920: Down all year, with GM in big trouble losing two-thirds of its value. Dow loses 40 percent for the year.
1939: Britain and France join the war to defend Poland. The market breaks 20 percent in March-April, only to recover late in the year.
1940: The Germans blitz the French border. Stock market crashes 40 percent into May.
1942: Britain, Singapore, and Bataan surrenders. The auto companies stop making cars to make war equipment. The stock market again breaks big into spring, with losses of 18 percent, and recovers late in the year.
1955: This was one of the rare years that January was down big, but immediately reversed upward to have a big year.
hhhhmmmmmm ... this brings to mind another "Seasonal" effect ... the "Decennial Cycle" ... which points out the Historical fact that years ending in '5' are the best years of each decade.
1956: A big down January brings a wild year with four moves up and down of more than 20 percent each.
1957: Another big drop in January sets a 20-percent crash in the fall in front of a big recession.
1960: U2 plane shotdown. Cuba seizes oil refineries. Market makes an October low, down around 20 percent.
1962: A drop in January sets up a 27-percent crash into the spring as Kennedy confronts the steel industry on price increases.
1968: Market drops huge in January and February, but recovers all year despite assassinations of Martin L. King, Jr. and Robert Kennedy.
1970: Nixon's State of the Union address brings disappointment and market cracks. Then in April, U.S. troops enter Cambodia. Dow falls from 811 to 631, bottoming in the summer.
1973: January starts bear market. Watergate! Gold soars. Interest rates move up sharply. The stock market loses 20 percent into the summer, recovers three-quarters of the loss by the fall and collapses to new lows in November.
1974: The bear market is in full force. The prime rate rises above 11 percent .. a record. Nixon resigns! The stock market drops 45 percent from all-time high made 20 months earlier.
1978: A very bad January and February see a great rally into the fall, with a crash late in the year accompanying riots in Iran. The Shah is on the way out.
1984: A January break sets up the market for a 12-percent decline into July. A strong late-year rally brings only small losses for the year.
2000: A huge January downside reversal on the charts sets up the year of the "dot.bomb." The bull market peaks in March, but big declines don't hit until December as the tech bubble bursts. Decline lasts until 2002 with the NASDAQ losing 80 percent of its value.
As you can see, most of the big down Januarys came in front of eventful years, which at some point had very large declines. Some years, though, did have rebounds. So something is probably in store for us this year and it likely will not be pretty.
Will it be the dollar, rising oil prices, a bond-market crash, another war, or another terrorist attack that triggers a big decline ?? Whichever, based on this history, the odds are that the stock market will see a swoon this year that will bring a loss nearing 18-percent.
Why? .. because even in the best of the years when January was down, the market at some point in the year dropped 18- to 27- percent. We started the year with the DOW at 10,718 ... an 18-percent drop would bring us to 8,788. Ouch!
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