Are January blues a sign of things to come?

In the first part of this month I wrote a post about the “January effect’, click here to read it. It discussed the significance of the first 5 trading days of the year, specifically how it has historically been a fairly accurate predictor of how the stock market will do for the rest of the year. For those who are too lazy to read that post I submitted on Jan. 10, 2010, the basic premise was that the first 5 trading days were a good predictor of how the month of January will do and that was a good predictor to how the stock market will fare for the entire year. These statistics have actually been tracked since 1900 and have a high accuracy rate.

However, there is already a split in the concept this year. The first 5 trading days were up, but January finished down. What that did was it made people look more closely on the historical track record. The problem is that when you start to do that then you can really take one formula and it shows one thing but then, when you look at a different set of number it points to something else.

Another interesting spin to this idea is that although this trend has been fairly accurate for the last 110 years or so, last year was one of the relative few years where this trend did not prevail. January of last year finished down, but the 2009 trading year on the whole finished up substantially. So perhaps it was the beginning of the end for the accuracy streak of the ‘January effect’. A lot of experts think that 2010 will finish up but, you can still definitely find those that think the opposite. Besides, what do they experts know anyways? Most of them did not predict this past recession at all.

The most interesting thing about all this that I noticed was that after those first 5 trading days had passed and the news was good, then everyone in the business media was praising the ‘January effect’ for being so accurate and had pro investors talking about how they put a lot of emphasis on that metric. However, now that January ended down for the month, all I see is how the experts and pro investors do not take the ‘January effect’ seriously and give excuses as to why the month ended down by pointing to various news stories that contributed to the drop. It seems that regardless of how accurate this trend is (and I personally don’t know what to think as I am not a professional investor) it appears that the general sentiment is that people really, really want the stocks to go up this year (even more than most years because of the recession) and maybe that will encourage them to invest which would certainly help raise the stock market.

I am not going to give you advice on whether you should use the ‘January effect’ as part of your decision making process or not, that is something you will have to decide on your own after you research all the figures, but I will say that it is not generally a good idea to only look at one set of data and base all your investment decisions on it. Anyways, since everyone else seems to really want 2010 to end higher for the year, here’s to the ‘January effect’ being wrong this time around.