By Mark Hulbert
Are stocks doomed for the rest of the year?
Stocks are not doomed for the rest of this year just because January’s low was below December’s low.
I’m referring to yet another of the January-based indicators to which investors turn for guidance on the market’s full year’s direction. Earlier this month I devoted a column to several of these indicators, concluding that they tell you next to nothing about how the stock market will perform for the year. Some of you responded that this conclusion is premature, since I didn’t focus on this other indicator-which supposedly has an impressive record.
This other indicator is based on comparing the stock market’s January and December low. It supposedly is a bad sign if January’s low is lower, which is the case this year: On Jan. 10 the stock market closed below its lowest close from this past December.
We shouldn’t worry, however. The indicator’s record is not significant at traditional standards of statistical significance.
The accompanying chart summarizes this record since World War II, which is the period focused on by the Wall Street research reports that readers have asked me to review. In those years in which the S&P 500’s SPX January low was above its prior December low, the market from February through December rose 76% of the time. When the January low was lower than the December low, in contrast, the market from February through December rose a statistically similar 71% of the time.
This 71% probability is a lot higher than the 50% odds that many on Wall Street are reporting for years when January breaks the December low. But the calculations that lead to that 50% involve a (probably unwitting) sleight of hand which causes what really is 71% to become 50%.
The sleight of hand is to calculate the indicator’s record by focusing on full-calendar-year returns. But because we have to wait until the end of January to know whether the month’s low has broken December’s low, the proper way to judge the indicator’s success or failure is over the period beginning in February. By improperly counting January’s return in the calculations, the indicator’s adherents in effect are double counting January’s loss in years when the month’s low breaks December’s low.
You shouldn’t be surprised that the indicator’s record is so poor. Almost all of Wall Street’s indicators are no better than coin flips. And in those very few cases in which an indicator is statistically and economically significant, traders waste no time exploiting them and, in the process, kill the goose that lays the golden egg.
This discussion doesn’t mean that the stock market will be higher at the end of this year than where it stands today. The absence of this indicator’s statistical significance means that we can draw no conclusion-either bullish or bearish-from the fact that January’s low broke December’s low.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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01-21-25 0810ET
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