Not that there’s any good day for the market to move lower, but of all the days that investors most definitely didn’t want to see a sizable pullback, it was yesterday — Monday, Jan. 5 — when the S&P 500 took a hefty 1.83% loss.
The problem: The stats say a selloff on the second trading day of the new year almost always sets up a loss for the month of January.
Were this the only red flag waving at this point, one might be able to dismiss it as nothing more than chance. But when waved in tandem with another red flag we simply can’t afford to ignore right now, traders might want to prepare for the worst this month.
Numbers Don’t Lie
Giving credit where it’s due, it was Chad Gassaway that did the legwork to find out what it means when the most reliably bullish day of the year — the second trading day of January — results in a loss of more than 1% for the S&P 500. Although it’s only happened five times since 1950, four of those five times the index also lost ground for the entire month of January.
It wasn’t a chump-change pullback, either. The average dip in January when its second trading day doled out a loss of more than 1% was a whopping 2% — and that includes the one exception in 1991 when the S&P 500 gained 4.15% that January despite the rough start.
Just for perspective, it’s not like January losses are the norm. Going back to 1950, the S&P 500 has made some sort of gain in the first month of the year 39 times (60%). And as Gassaway’s deeper look reveals, positive net results for the first three trading days of January accurately predicted some sort of gain for the month nearly 73% of the time. Conversely, if the first three trading days of the year were net-negative, that was a successful omen of month-long weakness nearly 62% of the time.
In other words, investors have good reason to be alarmed by how 2015 has gotten started.
Does This All Seem a Little Familiar?
Regardless of what the first three days of the year look like, and regardless of what the second trading day of the year doles out, investors had plenty of reason to worry about a January pullback to begin with.
Some have noticed this already, but many have not: The shape of the S&P 500’s chart over the past several weeks looks suspiciously like the shape of the S&P 500 chart for the last quarter of 2013. This matters because the year-end action for 2013 set up a nasty selloff to start 2014. In January of last year, stocks lost 3.5%, and ultimately fell 5.7% from their December peak before hitting a bottom in early February.
Although the parallels between the end of 2013 and the end of 2014 don’t guarantee a bearish January this year, the similarities are eerie, and concerning.
January Weakness Is Nothing to Toy With, Either
The odds of a pullback this month are only part of the concern here. Equally alarming should be the fact that if a retreat is in the cards for January, it’s likely to be a big dip.
On average, the S&P 500 moves higher by 0.94% in January, but that nominal number is more than a little misleading. When January is good, it’s really good, but when it’s bad, it’s stunningly bad.
When the market makes a gain in January, it’s on the order of a 4.2% advance. When the S&P loses ground in January, it falls an average of 3.6%.
That makes January the most reliably volatile month of the year, for better and for worse.
Bottom Line
While historical tendencies are never guaranteed to repeat themselves in any particular year, the averages and the statistics are discernible — and decisive — for a reason. As for January 2015, we’ve got not one but two historical reasons to look for bearishness this month. The math says it’s not going to be a mere lull, either.
Investors would be wise to tread lightly at this time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
