Five Days in January: Zero Predictive Value
Editor's Note: This is a bonus story from James Altucher, whose commentary usually appears only on RealMoney
. We're offering it today to TheStreet.com
readers. To read Altucher's commentary regularly, please
I've been reading a lot in the media about the January five-day barometer. The idea being that if the first five days of the month are up, then one should buy and hold for the rest of the year. If the first five days of the month are down, then one should sell (or short) and hold that position for the rest of the year.
At first glance, this "early warning system" appears to be superficially true. Since 1956, the first five days have been up on 31 occasions. Buying at the close of the fifth day and holding until the end of the year resulted in success in 23 out of 31 occasions, for a success rate of 74%.However, while it seems predictive, the question to ask is: "As compared to what?" Is it any more or less predictive than any other five-day period? In fact, since 1956, buying at the close of any positive five-day period, and holding for 245 trading days, has resulted in success on 71% of the 6,835 occurrences. So the predictability of the first five days is not really any more or less than that of any random five-day period, and I would not base a yearlong allocation on this so-called "early warning system."
A Kernel of TruthHowever, using the month of January as a predictor is not completely without merit. Since 1956, the market has been up for the entire month of January on 30 occasions. In 26 of those years (86%), the market was up from Jan. 31 until Dec. 31 for an average return per trade of 11.38%. On all other months, if that month was up, buying and holding for 11 months worked on only 72% of occasions for an average return of 7.6% per trade. None of this is something I would build a trading system around. However, it's interesting to note that while the five-day barometer has zero merit, January as a whole may offer slightly more predictability. However, this only works with confidence when January is up. In the 18 occasions when January has been negative, the remainder of the year was positive nine times and negative nine times.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV