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 MEA CULPA: An earlier version of this article as well as my article last week contained an error. In one place each article mentioned looking at the performance of the Dow during the "last five trading days of the year." This is an error. None of the measures included among the January indicators that I have been writing about includes any "end of year" calculations. Everything takes place during the month of January. So those lines should have referred to the "last five trading days of January," NOT the "last five trading days of the year."

And as soon as I think up a really good excuse for making the same mistake not only once but twice, I will be sure to pass it along. In the meantime, please accept my apology for the confusion and for posting incorrect information. (Note: both of these articles have been edited to reflect these changes on Optionetics.com.) Jay Kaeppel

NEWS FLASH: Pay close attention to the performance of the Dow Jones Industrials Average between the close of trading on January 23^rd and the close of trading on January 30^th. The fate of the stock market hangs in the balance!

Okay, well that was pretty dramatic. And yes, perhaps I exaggerate just a tad. Still, it is possible to make just that case. So let’s get on with it.

In the past several weeks I have been highlighting a variety of “January indicators” that purport to foretell the future of the stock market during the remainder of the calendar year based on certain measures of stock market performance during the month of January. And in fact, there does appear to be some utility to all of it. Consider the following:

• When the Dow Jones Industrials Average has registered a net gain during first five trading days of the year, the Dow then advanced 82% of the time between the end of January and the end of December.
• When the Dow Jones Industrials Average has registered a net gain during the month of January as a whole, the Dow then advanced 82% of the time between the end of January and the end of December.
• When the Dow Jones Industrials Average has registered a net gain during last five trading days of the month of January, the Dow then advanced 83% of the time between the end of January and the end of December.

So, I may be crazy, but at least I have the numbers to back it up. Er, wait, that didn’t come out right. In any event, the purpose of all of this is twofold. One purpose is to alert you to the potentially useful information that all of this is trying to impart upon you. The other - and let’s be brutally candid here, primary - purpose is to promote my new book Seasonal Stock Market Trends, published recently by Wiley (sorry folks, the rise of socialism in America may be all the rage at the moment, but capitalism ain’t entirely dead yet).

So this week, let’s tie it all together and put a bow on it. In my book I discuss something I have dubbed “The JayNewary Barometer”  (My name is Jay, it’s new, it’s the month of January, it’s a play on the Hirsch organization’s January Barometer, yada, yada. Capitalism isn’t dead, and neither apparently are corny acronyms. But I digress).

The JayNewary Barometer

The JayNewary Barometer is calculated after the close of trading on the last trading day of January and can range from a reading of 0 points to +3 points. The more points the better.

• If the Dow Jones Industrials Average shows a net gain during the first five trading days of January, add one point to the model.
• If the Dow Jones Industrials Average shows a net gain during the last five trading days of January, add one point to the model.
• If the Dow Jones Industrials Average shows a net gain during the month of January as a whole, add one point to the model.

So as you can see, the JayNewary Barometer (heretofore JNB) will end up ranging from 0 to +3. So why should you care? Well, consider the following points of interest:

• Following JNB readings of +2, the Dow showed a gain between January 31^st and December 31^st 20 of of 22 times.
• Following JNB readings of +3, the Dow showed a gain between January 31^st and December 31^st 22 of of 24 times.

All told, following JNB readings of +2 or more, the Dow showed a gain 42 out of 46 times, or 91% of the time. Also, note that the Dow showed a loss between January 31^st and December 31^st 6 out of 7 times following a JNB reading of 0 (including the -30.8% debacle of 2008).

Table 1 sums up the performance results

Table 1 sums up the performance results of 0 (including the -30.8% debacle of 2008).

Table 1 - January 31^st through December 31^st Dow performance following a given JayNewary Barometer reading

As you can see in Table 1, the February through December performance for the Dow has been outstanding when the JayNewary Barometer was +2 or higher and not so good when the reading was 0 or 1.

January 2009

The Dow Jones Industrials Average was down over the first five trading days of 2009. As this is written the Dow needs to rally about 700 points in order for the month of January as a whole to register a gain. While anything is possible and I am all for it, the odds are not good. That leaves the last five days to show a gain in order to avoid a JayNewary Barometer reading of “0."

Why does this matter? Consider the results that appear in Chart 1, which displays the growth (or more accurately, the decline) of $1,000 invested in the Dow between January 31^st and December 31^st, only during those years when the JayNewary Barometer registered a “0” reading. The results are not pretty.

 

Chart 1 - Growth of $1,000 invested in Dow Industrials from January 31^st through December 31^st during those years when the JayNewary Barometer registered a reading of “0”

Summary

At the end of January 2008, the JayNewary Barometer registered a reading “0,” as the first five-day period, the last five-day period and the month of January as a whole all registered declines in the Dow Jones Industrials Average. From the end of January 2008 through the end of December 2008, the Dow lost another 30.8%.

So keep a close eye on the stock market this week. For a down week this week will result in another JayNewary Barometer reading of 0. While this would in no way guarantee a bearish 2009, it would be a seemingly bearish stock market omen. Of course, if the Dow closes up this week then the JNB will register a relatively meaningless reading of +1 (up 9 times, down 9 times), which essentially gives no clue whatsoever to the market direction for the rest of the year.

But given what we saw following last year’s JNB reading of “0”, I’ll settle for “meaningless."

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

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