That January Effect….

• Posted by Adam Warner
• on January 4th, 2010

IF I had a dime for every time I hear “January Effect” today…I’d maybe be able to afford seats in the upper deck at Yankee Stadium. But that’s only because I haven’t had TV on since this morning.

I asked Jason Goepfert if he had numbers handy on it, and he said he hasn’t run any in a while, mainly because “it’s one of those things where hype is a lot more interesting than reality.”

Yes and yes.

Here’s the gist. As per Minyanville, quoting Dennis Gartman, looking at The Stock Traders Almanac, “in 31 of the last 36 years that saw gains in the first five days, full-year gains followed, for an 86.1% accuracy ratio and a 13.7% average gain in all 36 years.

That just strikes me as one of those misleading stats like “the Eagles are 8-0 when they run 25 times or more”. It sounds great, just run the ball 25 times to start the game and bingo, you win. Except it fails to account for the context. Like why aren’t they running? Could it be they are behind? Maybe their defense can’t get off the field? I could go on.

As to the market, I need context for that stat. The market goes up most years. The market also often rallies at the beginning of a calendar month. So I ask, does the market also do poorly when it declines on the first five days? Is this opening year run any better than any other 5 day run in terms of predictive value?. In other words, how about a March rule. Does a rally in the first 5 days of March portend anything spectacular for the ensuing 51 weeks?

The rule “failed” as recently as last year. The market was down the first week and down in January, and yet miraculously we rallied.

I’m modestly bullish just because….well, why fight the tape. But to me this January Indicator means barely more to me than the Super Bowl Indicator.

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