Market Minute: January 29, 2012: The "January Effect" and the probabilities for 2012
by Donald W. Dony, FCSI , MFTA, The Technical Speculator
The strength in the S&P 500 this month tells more about the performance for the rest of the year than most investors realise. Over the last 40 years, whenever the US market has had a return above 3.75% in January, the S&P 500 finished the year higher. Currently, the index is up 4.44%.
Since 1970, there has been 13 times when the US market has been above 3.75% in January. Every time the index completed the year with a substantial gain.
The 13 Januarys with returns of 3.75% or greater were in 1971, 72, 75, 76, 79, 83, 85, 87, 88, 89, 91, 97 and 99.
The average gain for the rest of the year was a surprising 19.6%. This means that if this January can finish above 1307.25, then there is a very strong probability of the index going higher in 2012. And as there are only two more trading days left this month, the US market would have to drop 10.77 points or more to cancel out the effect.
Bottom line: The S&P 500 has gained 4.44% in January. With two days remaining, the probability of a good performing 2012 is building. If the US index can close out the month above 1307.25, then there is a strong likelihood of another 15% gain by year-end based on 40 years of data.
Investment approach: The odds for a promising 2012 are mounting. If the S&P 500 does perform well, as the last 13 Januarys with a 3.75% would suggest, then investors may wish to remain fully invested this year to take advantage of the anticipated rise.
From an intermarket perspective, it is also worth noting what happens when the US markets moves up. The US dollar index and bond prices normally move in the opposite direction to the S&P 500. Commodities are closely coordinated with equities. If the stock market advances this year, so should base metal, gold, silver, oil and agricultural grain prices.
Also, there is a shift out of defensive sectors such as consumer staples, healthcare and utilities and a move to growth industries like technology, energy, mining, consumer discretionaries, construction and basic industry.
More research on commodities and the markets will be in the upcoming February newsletter.
