Stock Market 2013: Does January Barometer Signal Dow at 15,140?

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The stock market ended January 2013 with the Dow Jones Industrial Average up nearly 6%, the best month since October 2011.

The Dow closed Jan. 31 at 13,860.58, up 5.77% this month. The Standard & Poor's 500 Index closed at 1,498.11, up 5.04% so far this year.

That's good news for investors. The theory is that the stock market's performance in the first month of the year sets the direction for the following 11 months.

At this rate, evaluating a few market indicators, here's where we could be by 2014.

Stock Market 2013: Reading the January Barometer

First, to gauge where the market could be at the end of 2013, let's look at the January 5-Day Rule.

According to the Stock Trader's Almanac, the first five trading days during January overwhelmingly indicate whether the New Year will be a bullish or bearish year.

The first five trading days' performance has successfully called the S&P 500's direction 33 out of the 39 years where the five-days rule condition was met, or 84.6% of the time. Average annual gains over the last 39 years have been 13.6%.

Also, 11 out of the last 15 post-presidential election years on the S&P 500 have followed the direction of the five-days' rule which has particular significance as we are heading into a post-presidential year.

Now, in 2013, the first five-days rule has signaled a bullish bias.

For the S&P 500, it completed its five-days rule at 1,457, which if the pattern's averages hold true then the SPX is projected to end the year at 1,655.

Conservative projections for the Dow Jones, based on it having completed its 5-days rule at 13,328, indicate the Dow could end the year at 15,140 if average gains hold true for the bullish signal.

And that's just the first five days.

Now that stocks ended the entire month with gains, the January Barometer is flashing a green "Buy" sign.

This "early-warning signal" called the January Barometer was devised in 1972 by Yale Hirsch of the Stock Trader's Almanac.

The January Barometer has been wrong only seven times since 1950. The last time January was wrong was in 2001, when a 3.5% gain in the year's first month ended up in a 13% market slump by the end of the year.

However, a gamechanger for the market in 2013 may already be in the making, a potential "wildcard" that could make it a banner year compared to other bullish January performances.

2013 Stock Market Game Changer

The S&P 500 in January already passed 1,500, a major psychological price level.

Market veteran Art Cashin, the floor operations manager for UBS, mentioned the figure in his morning note on Jan 22, "Bulls need a breakout punch like S&P through 1500. The SPX struggled for three months in 2012 to clear 1,400, but once it did the average zoomed higher and the Dow industrials waged a similar battle with 13,000."

The result of the S&P crossing over the 1,500 could mean an outpouring of renewed faith in the stock market again, potentially ushering in a new secular bull market.

This is good for nearly all stocks.

Mark Boucher, global hedge fund manager and author of "The Hedge Fund Edge," wrote that nearly 80% of all stocks move in tandem with the larger overall market.

That means that through a combination of the January Barometer signaling a bullish signal for 2013 and the stock market pushing through historic highs, this secular bull market could pull the majority of stocks to higher price levels.

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  1. H. Craig Bradley | February 3, 2013

    PEOPLE WANT TO BE PLAYED

    Well, 2013 could be another year in which the large indexes return the annual average of 12% as they did in the 80's and 90's. Last year was pretty good too, at least for a globally diverse portfolio of index funds and actively managed mutual funds, as well. How about 2014?

    Looking at history, the two years immediately following a second term presidential reelection are most commonly characterized by financial crises, stock market crashes, and yes- wars. We may have a good 2012 AND 2013, but how long do bull markets last if the overall economy is still weak. A shocking reversal may appear the moment interest rates increase, even by only 1% on 10-year Treasuries.

    In fact, former Republican presidential candidate Mitt Romney ( no longer "Governor Romney", as his last job was as a candidate) said a year ago in 2012: "We will probably experience a "bond market crisis" about midway during a second Obama term". Of course, the votine public was not listening or even interested. So, if it indeed comes to pass as forecast, here is my response for the record: " Tough tacos ! "

    However, a bond market crisis would take everyone by complete surprise (just like Pearl Harbor), except for a small number of outlier financial pundits who will certainly crow out loud that they "saw it coming" once again and you should have subscribed to their (expensive) newsletter to have protected yourself (your assets). The media will continue on the optimistic, follow-the-herd bullish theme: we are in a recovery and the stock markets are responding accordingly. People (crowds) like to be played (for suckers).

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