The market decline on the last day of January spoiled what would have been the fourth consecutive January Trifecta. S&P 500 finished January down 0.2% and thus the January Barometer is negative.
Devised by Yale Hirsch in 1972, the January Barometer has registered ten major errors since 1950 for an 85.7% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the ten major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001.The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. Including the eight flat years yields a .743 batting average.
The near-term outlook for the market has diminished as every down January (page 22 Stock Trader’s Almanac 2020) since 1950 was followed by a new or continuing bear market, a correction or a flat year. If the spread of the coronavirus is slowed or contained quickly, then the market could quickly regain footing and begin to recover.
This year’s combination of a positive Santa Claus Rally and First Five Days with a full-month January loss has only occurred eleven times (including this year) since 1950. In the previous ten occurrences S&P 500 was down six times in February with an average loss of 1.5%. However, over the remaining 11 months of the year, S&P 500 advanced 80% of the time with an average gain of 7.4%. Full-year performance was positive 70% of the time, but with an average gain of 2.9%.
Because we do not rely solely on a single indicator or pattern, DJIA’s December closing low of 27502.81 is still a key level to be watched. Lacking the backup of other patterns and indicators, the last day of January reversal could have been entirely due to the coronavirus. Any developments over the coming days and the market’s response will be indicative as to whether or not recent market weakness manifests into a correction or worse.