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Stock Market Gains This Week Will Determine the Rest of 2012

Stocks in this article: SPY

NEW YORK ( TheStreet) -- If stocks rise in the first five trading days of January, there's a good chance the equity market will end the year with a gain.

There's an 87% probability the benchmark S&P 500 Index will increase this year if shares advance today through next Monday, according to the Stock Trader's Almanac. That's known as the First Five Days theory. So far, things are looking up -- the S&P has jumped more than 2% today.

Taking the First Five Days theory a step further is the historic trend known as the "January Barometer." Under that rule, the performance of the S&P 500 in January serves as telltale sign for full-year performance. Since 1945, if the S&P 500 increased in January, the market rose 88% of the time for an average yearly advance of 15.7%.

The January Barometer is even better at forecasting performance in an election year. In the fourth year of a president's term when the market has risen in January, the S&P 500 rose 100% of the time for the full year. If January ended in the red during an election year, the full year ended down half of the time.

To be sure, 2011 was an exception to both the January Barometer and the First Five Days rule. While stocks rose in the first five days and in January as a whole -- by 1.1% and 2.3%, respectively -- the S&P 500 was flat on the year.

Sam Stovall, chief equity strategist at S&P Capital IQ notes: "What the January Barometer doesn't tell you is the level of volatility an investor will likely experience. While 2011 wasn't among the worst years in terms of volatility, it certainly was greater than average."

As the presidential campaign heats up and European turmoil continues, 2012 is likely to be volatile for the stock market. According to Stovall's research, the market typically sees only a modest gain in stocks in the first 10 months of an election year before popping about 1% in the last two months of the year after election uncertainty passes.

But if the market holds on to today's early gains for the next four days, and you can withstand the pressure, there's a good chance you'll make bank on your investments.

-- Written by Lindsey Bell in New York.

>To follow the writer on Twitter, go to Lindsey Bell.

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