The telling ‘first 5 trading days of the year’

This past week there was a lot of talk about the first five trading days of 2010. Economists, traders, CEO’s, investors and other influential people kept a close eye to see if the stock market finished up by the end of the week more so than they usually do. Why? This type of data has been tracked since 1900. If after the first five trading days the market is up, then chances are the month of January will be up as well (historical track record bares this out). Investors always look to see how January ends as there is something called the ‘January effect’. The historical records show that since 1950, only five times has the results in January differed from that entire year. That means that if January finishes up then, there is about a 90% chance that the stock market will finish the year higher than when it started.

So, since the first five trading days of the year are almost like a crystal ball for the next 12 months, the question has to be: How did the market do?

The news is good. The Dow Jones Industrial Average finished the week up 1.8% which is higher than the average increase for that week between 1900 and 2009. The S&P 500 and NASDAQ both closed up as well, 2.7% and 2.1%, respectively, for the same period. Now we just have to hope that not only does 2010 fall in line with the first five trading days but also that the rest of the economy picks up this year as well, primarily the employment situation and other economic concerns.

If you are looking to invest in the market, then there are investors that actually take this ‘January effect’ seriously and use it as part of their investment plan for the year. If you also choose to go by this trend then that’s fine, but this still doesn’t tell you which companies will do well or poorly this year. It only suggests that the indices as a whole will be up.  Therefore, if you were to only look at this single data point to make investment decisions, then you would only invest in the indices themselves and steer shy of investments of individual companies. However, I strongly advise you NOT to use any single data point as your only tool for investing, even one that has a high percentage of coming to fruition.