It’s a new year, and traders’ eyes are locked on the market’s January performance to see how the rest of 2023 might play out.
Traders refer to this as the “January Barometer,” a theory and term coined by Yale Hirsch, creator of the Stock Trader’s Almanac, in 1972.
Statistically, if the stock market closes higher at the end of January than the beginning, nearly 70% of the time, the year will also end above January’s gains. That is far above the normal edge the stock market has for positive year-end gains.
However, if the major indexes lose ground in January, the potential for the rest of the year to be positive reverts to its normal 55%. So, a bearish January doesn’t make it more likely that the stock market will fall the rest of the year, but a bullish one makes it much more likely that it will rise.
The real secret behind the January Barometer is likely earnings performance. January is when most companies report their fourth-quarter and annual profits to shareholders, and if the data looks good, the trajectory takes a while to change and should remain positive even if economic headwinds worsen before summer.
It goes without saying that 2022 did not offer any bullish tailwinds to usher us into a more prosperous 2023… yet. That doesn’t mean that the remainder of the month will be bearish, but we must shake off the 2022 hangover first…
Emerging from a Bearish 2022
There was no “Santa Claus rally” in December, so we don’t have that to build on. But there are plenty of variables that could boost the market throughout the year.
So far, we’re still waiting to see if the S&P 500 can break back out of bear-market territory below 3,854. The index tried at the opening bell earlier today, the first day of trading in 2023, but pulled back in the afternoon.
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2023’s Bright Spots
If we can see the S&P 500 break higher, we’ll be looking for it to break above down-trending resistance. We think that the barometer for the start of 2023 is whether we can get out of bear-market territory.
To emerge from the bear market, a few other things need to happen. The economy is still resilient, which is good news. That has been providing a solid foundation for certain sectors to profit in the bear market. We don’t see much changing with consumer defensive stocks – the long-term trends still favor stocks like Target Corp. (TGT), Costco Wholesale Corp. (COST), and Walmart Inc. (WMT).
But we also will be keeping tabs on how the financial sector performs. We’re watching how exchange-traded funds (ETFs) like the Financial Select Sector S&P SPDR Fund (XLF) will perform as we anticipate first-quarter earnings reports. Good earnings in April for the financial sector will be a harbinger of positive trends across many other sectors for the rest of 2023.
If you just can’t wait until then, stay tuned for next week’s earnings reports coming out on Jan. 11, 12, and 13. Many companies will be sharing how they did in the final quarter of 2022… and we can make some assessments of the moves we want to make in the wake of those announcements.
John and Wade
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