A long time ago, legendary market analyst Yale Hirsch popularized the phrase “As January Goes So Goes the Year”, averring that if the stock market performs well in January then the February through December period should look pretty good too (turns out he was right).  He also noted that the first five trading days of the month of January can provide a pretty useful “early warning sign.”   This is what we will focus on in this article.  We will refer to this as the “Fast Five” method (hey I should of been a marketing guy!).

The “Fast Five” Theory

We will use this “method” only as a bullish indicator as follows:

-If the first five trading days of January show a net gain then the rest of the year (from the close of January trading day five through December 31^st) should also show a gain.

If the Dow shows a loss during the first five days we will essentially have to "get another indicator".  But if that "Fast Five" period shows a gain we will hold a bullish viewpoint for the remainder of the calendar year.

Sounds optimistic no?  But let’s take a closer look.

The “Fast Five” Numbers

Before breaking things down a bit let’s get right to the performance numbers.  Since 1937 there have been 48 years that have seen the Dow Jones Industrials Average register a net gain during the first five trading days of January.

-37 times the Dow registered a further gain by the end of December.

-11 times the Dow registered a loss between the fifth trading day of January and the end of December.

-The average Dow performance was +8.0%, and the median performance was +10.4%.

-The maximum gain was +43.7% (1954).

-The maximum loss was -28.5% (1974).

It should be noted that this “method” got hit for double digit losses in the bear market years of 1940, 1941, 1966, 1973, 1974, 1987 and 2002. So clearly things are not all “sweetness and light” if early January is bullish for the Dow. Still the overall results are not only respectable but far above average (to say nothing about “ease of use”).

Figure 1 displays the growth of $1,000 invested only from the end of the fifth trading day of January through December 31^st during those years that witnessed a gain for the Dow during the first five trading days of the year.

Figure 1 – Growth of $1,000 invested from January Trading Day 5 through December 31^st if Fast Five shows a gain for the Dow Industrials (1938-2010)

Digging a Little Deeper

As a number geek I could not help but to wonder if the size of the gain during the first five trading days provides any additional useful information.  It appears that it does.  Before presenting the specifics please note that Figure 2 displays all of the “First Five up” years ranked by the size of the gain registered by the Dow during the first five days of January.

Figure 2 – “Fast Five” results ranked by % gain during first five trading days of Year

Figure 3 displays a few figures of note regarding the data shown in Figure 2

Figure 3 – Stronger “Fast Five” returns tend to be followed by larger, more consistent gains

Items of note:

-There have only been seven times that the Dow has registered a Fast Five gain of 3% or more.  While this is an admittedly small sample size the fact remains that the market showed a subsequent gain all but once with an average gain in excess of +15%.

-The Dow would need to close on January 9^th at 12,584.08 to fall into this category.

-Fast Five gains in excess of +1.5% have witnessed subsequent gain 85% (22 out of 26) of the time with an average additional gain of +10.4%.

-The Dow would need to close on January 9^th at 12,400.82 to qualify this time around.

-Fast Five gains of +1.5% or less have still been followed by further gains more often than not, but only 15 outof 22 times (68%), with an average additional gain of only +5.3%

So when it comes to the Dow registering a gain during the first five trading days of the year, it would clearly appear to be a case of "more is better."

Summary

So can an investor really just follow the stock market for five days a year and become a forecasting expert?  Well, not necessarily.  Each year is another spin of the wheel, another roll of the dice, another dance with the devil, another (your cliché here).  So, no, nothing is ever written in stone, especially when it comes to the stock market. 

So instead of pretending that we’ve uncovered some magic formula here, the real key here is simply to note the closing price of the Dow Jones Industrials Average on Monday, January 9 (the fifth trading day of 2012).  If the Dow closes at 12,400.82 or above it will flash a bullish signal that has been 85% accurate over the past seven and a half decades. 

So is the "Fast Five" method the one great, ball, end all market timing indicator?  Not hardly.  Still, as something of an indicator “junkie”, I can tell you one thing for sure - I’ve seen worse. 

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ Your Options Education Site 

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