January effect smiles on stocks so far in 2013

Traders work on the floor of the New York Stock Exchange on January 2, 2013, in New York City.(Photo: Spencer Platt, Getty Images)

Story Highlights

• Since 1950, stocks have finished year up 85% of time after posting gains in first five days of year
• If early-year gains can stick through January, it could boost investor confidence
• Seasonality aside, market moves to be driven by politicians and global economy

NEW YORK — Is the stock market's "early warning system" sending an all-clear signal to investors?

Five trading days into 2013, the Standard Poor's 500-stock index is up 2.2%. And, if history is a reliable guide, that bodes well for investors.

The past 40 times since 1950 that U.S. stocks posted positive gains in the first five days of trading, full-year gains followed 34 times, or 85% of the time, with an average gain of nearly 14%, according to the Stock Trader's Almanac, the bible of stock market seasonality trends. (The last time this indicator gave a super-faulty reading was during the bear market in 2002, when stocks fell 23.4% despite rising 1.1% in the year's first five days.)

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In contrast, in the 23 years stocks fell in those critical first five days, the market has finished the year in negative territory nearly half of the time.

So, is the quick start in 2013 a sign of more gains to come?

"This is a good start," admits Almanac editor Jeffrey Hirsch. It follows a positive reading from the so-called Santa Claus rally, which showed up late in 2012 as Washington lawmakers sealed an 11th-hour deal to avoid the bulk of the economic hit caused by the fiscal cliff.

But Hirsch would like to see one more key seasonal indicator flash a green light. Simply put, stocks must finish up for the entire month of January. Indeed, as January goes, so goes the market, according to the Almanac's incredible "January Barometer." If stocks rise in the first month of the year, they tend to finish the year higher. Since 1950 this indicator has been accurate roughly 90% of the time.

"When all three of the seasonal indicators are positive, it is even a better sign," says Hirsch.

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Hirsch headed into the year more sanguine about the market's prospects, and while recent seasonal trading trends point up, he's far from a super bull. In fact, depending on how the debate in Washington over the deficit plays out in coming months and how the global economy holds up, he says stocks could have a good year, with gains of 5% to 10%, a so-so year with flat returns or a very bad year, with stocks suffering bear market declines of 20% or more.

"There is something to this seasonality," says Price Headley, president and CEO of BigTrends.com. If stocks can finish January strong, it is likely to give investors a confidence boost and set the tone for the year, he says.

With bonds losing value, the Federal Reserve still supporting markets, inflation not yet a threat, stocks are in a "sweet spot," Headley says.

The theory behind the early-year gains is that investors typically enter a new year with fresh optimism and pour fresh cash into the market. Some investors aware of the seasonal strength also look to get into the market so they can capture the gains, Headley adds. "Fresh money coming in is the big driver," he says.

Source: http://www.news.theusalinks.com/2013/01/08/january-effect-smiles-on-stocks-so-far-in-2013/