Traders spend a lot of time in January discussing the “January Effect” and its impact on the full-year equity performance. While the accuracy of January on ‘predicting’ whether we’ll be in the green or red at the end of December has been historically high (88.9%), there’s a level I’m watching right now that has more implications in the coming months.
This is the topic of my TraderPlanet article for this week. Here’s a piece:
Now let’s move on to the lesser discussed topic that some may argue has a greater impact on intermediate-term returns. Also discussed in the Stock Trader’s Almanac is the December Low Indicator. Like the January Barometer, going back to 1950 when the prior year’s December low was taken out in the preceding year’s first quarter, the Dow Jones Industrial Average has dropped an average of nearly 11%. The most recent example of this was in 2010, from the point of breaking the 2009 December low, Dow dropped 4.8% before finding a new low in ’10. 2009 saw a 17.6% drop and 2008 (being exacerbated by the financial crisis) dropped 42% before making a year low after dropping below the respective past December lows.
Read the rest: The Important Equity Level To Watch (TraderPlanet)
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Hello Andrew,
Thanks for your commentary. Has someone re-worked it to work out how the the end year level relates to the end January level; for one only knows if the Jan month effect is indicating up or down at the end of Jan; and by now this year those who were in during Jan have lost about 3.5% before they know the result of the end Jan effect. . In that sense , assessing the end Dec to end Dec result on an end Jan result is biased as only years with an initial negative are included (ie self-fulfilling selection). This year the market may rise 2% form end Jan and still be down for the year, but the message now should be buy and not sell( especially when dividends are included).
Hi gdcox,
Great question. From what I’ve seen and the math I’ve done, there data does not show a correlation to the drop in January predicting the severity of the decline for the full year. Since 1980 the avg. down January has been -3.88% while the year’s with down January’s have averaged just -0.16%. Hope that helps answer your question.