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Down month, down year?
Followers of the January barometer are worried about the prospects for stocks this year. Should you?
January 28, 2005: 4:45 PM EST
By Alexandra Twin, CNN/Money staff writer
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NEW YORK (CNN/Money) - Barring a massive rally Monday, January will be a down month for stocks, and that may be a bad omen for the rest of the year.

A rally big enough to push stocks higher for January would be a tall order for Monday -- for example, the S&P 500 index would need to gain more than 40 points -- and that's not good news for those who put faith in the January barometer, the old Wall Street saw that says so goes the month, so goes the year.

Or more specifically, according to the Stock Trader's Almanac, "so goes the S&P 500 in January, so goes the year."

Sure, the major gauges managed to close the week slightly higher, thanks to a mini rally in the middle of the week. But the indexes are down for the month. As of Friday's close, the S&P 500 is down 3.3 percent for the year.

Since 1950, there have been 20 down Januarys for the S&P 500, all of which preceded a new or extended bear market, or a flat market, except for one year, according to the Almanac. But in eight of those years, the broader market ended flat or with slight gains.

There's another hurdle for the market this year -- 2005 is the first year of a new presidency, which the Almanac says can be another negative. This comes from the belief that the stock market tends to follow the cycle of the presidency.

You want to get even more specific? Whether January was an up month or a down month, the full year echoed it for 13 of the last 14 post-election years, according to the Almanac. The exception was 2001, when the first contested election in more than 100 years sent stocks tumbling, despite an up January.

So we're destined for a down year, right?

Maybe, maybe not.

"Like any indicator, whether it's the Super Bowl or anything else, it's sometimes right and sometimes wrong," said Hugh Johnson, chief investment officer at First Albany. "It's just not very rational to conclude that if January is a bad month, the market will have a bad year."

Here's a look at some of the key arguments on either side.

1. All indicators are suspect

In fact, many statisticians mock the January barometer, as well as many other market indicators. Why? Because in the grand scheme of things, they analyze too few years to be statistically relevant. The Dow Jones industrial average has only been around since 1896.

Still, as far as indicators go, the January barometer is more reliable than say, the hemline indicator, the Super Bowl indicator or the dreaded Shaq curse, particularly in odd-numbered years, like 2005, according to the Almanac.

"We have found that in general the January barometer works well," said Ed Clissold, senior analyst at Ned Davis Research, a firm specializing in stock market research.

That tends to be the case because events in January can be so influential, according to the Almanac. Congress convenes; the president gives the State of the Union address, announces the new budget and highlights priorities for the year ahead.

2. 1982: more than acid-washed jeans

The one year since 1950 when the S&P 500 fell in January but stocks still rose sharply for the year was 1982, which started much the same way 2005 has. Stocks tumbled for the first three weeks of 1982 as they did this year.

But stocks recovered in the fourth week of January 1982, and stocks managed to close above unchanged in the fourth week of January this year.

Overall, 1982 ended up being a good year for the stock market -- in fact, it was the start of a major new bull market.

Back in 1982, the S&P 500 sank about 1.8 percent in January, but rallied in the second half and ultimately scored a 14.8 percent gain for the year.

But Jeffrey Hirsch, editor of the Hirsch Organization, which publishes the Stock Trader's Almanac, said that 1982 was truly an anomaly, as it followed many years of sideways trading.

"The market dropped dramatically after January 1982, bottomed, and ended up rallying and starting the next bull market," Hirsch said. "We're not at all in the same part of the cycle right now."

But Hirsch said that should the market rise through the end of January, even if it closes the month lower, that might help dull the negative impact of the first three weeks.

3. Year 5 is usually a good one

The fifth year of a decade has not been a down year for the market in 120 years, according to the Almanac.

That tends to be the case when fifth years are election years, and also when fifth years of a decade mark the start of the second term for a sitting president.

Deflating this, Hirsch said that while the fifth year indicator is relevant, it is not as powerful a pattern as the January barometer and tends to be coincidental.

4. Second term, same president

The first year of a new presidential cycle tends to be a down one. Yet, the first year of a second term for the same party tends to be a good one, according to Standard & Poor's.

The S&P 500 has risen on average around 12.9 percent in the post-election year if an incumbent candidate or party won re-election, which is what happened this year with George Bush and the Republicans.

When the incumbent candidate or party was a Democrat, the S&P 500 rose, on average, 16.8 percent. When the incumbent was a Republican, the S&P 500 rose 5.5 percent.

5. 2005 may be tough regardless

Many Wall Streeters cite plenty of reasons 2005 may be tough for the market, and those reasons have nothing to do with the Super Bowl or the January barometer.

Stocks have risen for two years as the economy recovered from the last recession. Now corporate earnings growth is set to slow, making stock valuations lofty; economic growth is also expected to slow down, and at the same time interest rates are set to keep rising.

Moreover, the federal budget deficit is growing, energy prices remain high, and the dollar remains weak.

In the short run, the start of the year itself has revealed trends that First Albany's Johnson called "unsettling." He noted, for example, that stocks are down, traditional bear market winners such as consumer staples and utilities have done well, and that the dollar is still suffering.

But it's too early to say a negative trend is in place, he said. "The trends don't become meaningful until they are in place for at least six weeks to three months."  Top of page

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