Bears, Beware: January Barometer Is Bullish on the Trump Rally - TheStreet

This article, originally published at 6:06 p.m. on Tuesday, Jan. 31, has been updated with market activity.

Despite some rocky trading days at the end of January due to President Donald Trump's controversial stances on trade and immigration, the S&P 500 pulled out a 1.8% gain for the full month.

That means more to traders now than it would ordinarily, since the period is the one measured by the January Barometer, a popular gauge that can predict full-year performance.

"It's a pretty good barometer, especially when January is higher," Steve Suttmeier, Bank of America chief equity technical strategist, said in a phone interview. "It's meaningful. I think it's a very important thing to think about as we get through the bounds of 2017, even with all the volatility that the market's seeing."

The barometer, devised in 1972 by Yale Hirsch, Stock Trader's Almanac's editor-at-large, indicates an 87.9% chance that the S&P 500 will deliver gains for the full year if it rises in the first month, according to the publication's analysis.

While stocks rallied on Trump's pro-business agenda after his Nov. 8 election, his subsequent executive orders from a 90-day ban on immigrants from seven Muslim countries to a wall between the U.S. and Mexico, have prompted protests and wiped out some of the gains. 

Another analysis of the measure, by specialists at Bank of America, found gains after a U.S. presidential election to be accurate 77% of the time  -- with growth averaging 13.5%.

"That's typically what happens in the first year," Suttmeier said. "The president takes office, you get a little rally headed into January and then you pull back in February as people start to question. Then once you're out of February, you tend to rally sharply during the first year of the presidential cycle from March into the July-August time frame."

On the downside, if the S&P falls for the month in which a new president takes office, there's a 78% chance that the year will end badly, too -- with average losses of 6.9%. 

While some investors are questioning whether the Trump rally is over, the January Barometer's optimism is borne out by other market indicators like the so-called Santa Claus rally and the 'first five days' gauge.

In fact, Suttmeier says the chances of a positive year for the S&P 500 increase if two of the gauges agree. When the first five trading days are positive and the S&P closes January in the green, there's an 83.72% chance of an up year with average annual returns of 14.63%.

"We do think we can follow that bullish pattern into the middle of the year," he said. "The S&P could work its way to 2,400-plus by the middle of the year."

The first five trading days, after all, yielded a gain of 1.4% on the S&P 500 this year, offering a 75% chance of year-long growth, according to the Stock Trader's Almanac.

As for the Santa Claus rally, which refers to an increase in the S&P 500 during the last five trading days in December and the first two in January, it was 0.43% this year, compared with an average 1.4% since 1969, according to the 2016 Stock Trader's Almanac.

The S&P 500, which is comprised of 500 large-cap American companies stocks, is a leading benchmark for U.S. equity markets. It dropped 0.1% Wednesday to 2,276, widening four straight days of losses.