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Is This the Most Reliable Stock Market Indicator EVER?

I’m all for a day off in the market. But I’m not about to let Presidents’ Day keep us from busting a widely held belief on Wall Street, which we do every Monday.

So welcome to Myth-Busting Tuesday!

Today, I’m setting my sights on whether or not the current bull market is going to continue, based on one of Wall Street’s best-known indicators.

So let’s get to it…

The Straight Data on the “January Effect”

Many investors believe stock prices have run too far, too fast in the New Year. Of course, as I proved on Friday, that’s not the case. Yet investors still refuse to believe it.

Want proof? Look no further than the latest investor sentiment surveys from the American Association of Individual Investors (AAII).

After touching 52.34% in late January, AAII’s bullish reading has fallen for three consecutive weeks. It now rests at 42.25%.

As investors’ bullishness waned, though, the stock market has done nothing but charge higher. It’s up about 2% over this time period.

Indeed, investors sitting on the sidelines for the month of January missed the strongest rally to start a year since 1997.

And that brings us to the crux of the matter today…

Are investors on the sidelines bound to miss out on even more gains in the months ahead? Specifically, does the market adage, “As the S&P 500 goes in January, so goes the year,” hold any truth?

I’ll step aside now and let the data do the talking…

  • Out of the last 39 years that stocks rallied in January, they ended the year in positive territory 36 times. That works out to 92% of the time.
  • We can go all the way back to 1929, too. When stocks rallied in January, they finished the year in positive territory 73% of the time, according to Standard & Poor’s Howard Silverblatt.
  • And when stocks fell in January, they finished the year in negative territory 60% of the time since 1929.

Based on the data, it’s clear that the adage above holds true (for the overwhelming majority of the time).

And while that’s good news for stocks this year, here’s even better news from Deutsche Bank’s David Bianco…

During years when stocks rallied by 5% or more in January (1961, 1967, 1975, 1976, 1980, 1985, 1987, 1989 and 1997), “the S&P 500 climbed over 19% [for the entire year] – except for 1987, given the October crash,” says Bianco.

On average, the market advances at a staggering 23%.

Bottom line: Forget busted, this myth has been confirmed! And while there are no guarantees in the market, this year’s 5% January rally points to higher returns ahead. Especially if the Fed keeps doing what it does best – printing money. So don’t get caught sitting on the sidelines.

Ahead of the tape,

Louis Basenese