There has been some concern that the recent decline in U.S. stocks during the first five trading days of January is a predictor of a gloomy year for the market. Known as the “First Five Days of January” indicator, this theory suggests that the market’s performance during this period sets the tone for the entire year. However, delving into the data reveals that this indicator may not hold much weight.
In the case of 2024, it was only in the final moments of Monday’s trading session that the indicator officially turned bearish. The Dow Jones Industrial Average (DJIA) experienced a cumulative decline of seven points, while the S&P 500 (SPX) dipped by 0.1%. The Nasdaq Composite (COMP) saw a more significant drop of 1.1%.
Previously, I addressed this indicator in a column, where I explained that it lacked statistical significance based on historical data since the Dow’s inception in 1896. However, many readers have expressed a continued belief in its predictive power, prompting me to take a closer look.
Unfortunately, my research indicates that not only does this indicator lack statistical significance, but its track record has actually worsened over the years. Surprisingly, the U.S. stock market has, on average since 1970, performed better when the indicator was negative.
Detailed data on the historical performance of the indicator is presented in the table below.
| Year | Direction Indicator | DJIA (%) | SPX (%) | COMP (%) | |——|———————|———-|———|———-| | … | … | … | … | … | | 2024 | Bearish | -7 | -0.1 | -1.1 | | … | … | … | … | … |
It’s important to note that none of the differences reported in the table are statistically significant at the commonly used 95% confidence level. Therefore, if you’re considering making predictions about the market’s performance for the remainder of the year, it would be wise to disregard the decline experienced during the first five days of this year.
In conclusion, while the recent drop in U.S. stocks may have sparked concerns for some, historical data suggests that the “First Five Days of January” indicator is an unreliable guide for predicting the stock market’s trajectory throughout the year. It’s always crucial to approach such indicators with a critical eye and consider a broader range of factors when making investment decisions.
The Significance of First Five Days of January Indicator
There has been speculation regarding the statistical significance of the First Five Days of January indicator, considering its minimal negative performance. Over the initial five days of this year, the Dow only experienced a meager loss of 6.53 points. Some may question if such a minor decline alters the indicator’s message.
However, statistical analysis reveals that there is no meaningful correlation between the market’s first-five-days’ return and its subsequent performance throughout the year. This assertion is supported by two anecdotal examples:
- In 1900, the first-five-days’ return was comparable to this year’s, with a 0.09% decline in the Dow. Yet, the market went on to achieve a 7.1% return for the remainder of the year, mirroring the average performance across all years.
- Conversely, in 2016, the Dow experienced a loss of 6.2% during its first five days. However, from that point until the end of the year, it gained an impressive 20.9%.
Hence, it can be concluded that the market’s performance over the initial five trading days of January does not necessarily dictate its overall trajectory for the year.
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