First Five Days of January Indicator
This is a follow up to Mark Hulbert’s excellent post looking at the famed “first five days of January indicator”. As the story goes, if the market is up in the first five trading days of a new year, it portends strong returns for the remainder of the year.
From a 30,000 foot view (depending on how far back in history you go) the rule appears to have wings. Looking at the S&P 500 from 1931 to the present, when the year’s first 5 trading days were positive/negative, the index went on to close even higher 73%/44% of the time with a median return of +11.7%/-2.8%.
That’s pretty stark, but therein lays the problem with simple averages (and small sample sizes)…they fool you in to seeing things today that only existed in the past.
The graph above uses a 20-year rolling average to look at the percentage of years that went on to close even higher following a positive (blue) or negative (red) start. In other words, the results marked 1950 only include 1931 to 1950, the ones marked 1960 include 1941 to 1960, etc.
When viewed over time in this way it’s clear that whatever significance the indicator held petered out in the 1980’s. Prior to 1980 positive/negative starts to the year went on to close even higher 74%/21% of the time, but after 1980 the number drops to an even 71%/69%.
The second graph tells the same story from a different angle. Here I’ve used a rolling 20-year average to look at the median return following a positive (blue) or negative (red) start.
Prior to 1980, positive/negative starts went on to return an additional +11.5%/-7.0%. After 1980? +13.6%/+8.7% (well within the difference expected by randomness).
Closing Thoughts
In summary I agree with Hulbert’s debunking.
My only real contribution is a possible explanation why this axiom became an axiom: because for a very long period of time (small sample size aside) it looked like it had wings. But in today’s market, this one is better left to the teevee pundits.
[click for a summary of all recent posts about January Indicators]
Happy Trading,
ms
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