MILLBURN, N.J. ( TheStreet) -- With the first month of the year well behind us, it's time to tackle the market proverb: "As January goes, so does the rest of the year." The theory behind this maxim is that the market's performance in January will be indicative of the remainder of the year. In other words, if the market increases in January, then the rest of the year will also trade positively. On the other hand, if the market falls in January, then the rest of the year will also bring market declines. So in the spirit of one of my favorite shows, Mythbusters, the Finance Professor will attempt to prove or bust this market saying. As always, I start with my data base of returns for the S&P 500 (SPX) going back to 1950. For each of those years, I calculated the returns for January, the rest of the year (February through December), and the full year. To tie in the data with my recent article on how to trade the midterm elections, I've color-coded the election cycle years (blue: midterm election year; green: year before a presidential election; red: presidential election year; yellow: year following a presidential election). The table of returns is presented below:
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2. In 37 out of the 60 years, (62% of the time), the SPX rose for the month of January. That left 23 years (38% of the time) in which January was negative. 3. In 45 out of the 60 years (75% of the time), the SPX rose for the rest of the year, and in 15 years (25% of the time), the SPX declined the rest of the year. 4. In 44 of the 60 years (73% of the time), the direction of the SPX return in January was the same as the direction of the return for the rest of the year. Of those 44 occurrences, on 33 occasions a positive January was followed by a positive rest of year. The other 11 occurrences were negative Januaries, which resulted in negative performance the rest of the year. 5. In 12 of the 16 years in which the direction of January was the opposite of the direction for the rest of the year, January was lower and the rest of the year was higher. The most recent example of that occurrence was 2009. On only 4 occasions was January higher and the rest of the year lower, the most recent year being 2003. 6. January 2010 is already in the books as a negative year, so let's look at how the market did the rest of the year after declining in January. For all 23 negative Januaries, the rest of the year rose 12 times and declined 11 times. The average performance for the rest of those 23 years was -0.79%. When the SPX rose for the rest of the year after falling in January, the average return the rest of the year was 11.37%. When the SPX declined the rest of the year after falling in January, the average return the rest of the year was -14.05%.
7. Looking solely at the midterm election years, coded in green, we get some other interesting data. First, recall that January tends to be a down month for the midterm election year. According to my data, those midterm Januaries declined by 0.63% on average. However, the rest of the year increases by an average of 6.42%. 8. In 7 out of the 15 midterm Januaries (47% of the time), the SPX declined with an average return of -4.11%. In only three of those years was there a decline for the rest of the year. Note that January 2010 declined by 3.70%. So what does this all tell us? First, the proverbial "As January goes, so does the rest of the year" may be more anecdotal than factual. Furthermore, the saying may be more relevant to positive Januaries than negative Januaries. Of 37 higher Januaries, 33 were followed by a positive rest of the year. However, negative Januaries have much less correlation with returns for the rest of the year. In fact, especially for midterm Januaries, a decline in the first month has ften led to higher prices the rest of the year. Thus, in the parlance of Mythbusters' Jamie and Adam, the January market proverb is in part busted and in part plausible. -- Written by Scott Rothbort in Millburn, N.J.
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