The S&P 5-Day Rule That Traders Swear By Is Baloney

There is no shortage of investing rules floating around like "sell in may and go away."

And after a great first week for stocks, many are bandying the January indicator (i.e. if the first five days of January are great, then the rest of the year will be too), which operates on the same logic as the S&P 5 day indicator.

But in a Barron's piece, Mark Hulbert writes that this isn't the case. "Hope is not a strategy: There is precious little statistical support for the "first five days of January" indicator."

Drawing on historical data for the Dow going back to 1896, he notes that when the Dow was up the first five days of January, it was up 70 percent of the time the rest of the year and the average gain was 6.93 percent. Whereas, when it was down in the first five days of the year, it was up 58 percent of the time for the rest of the year with an average gain of 6.2 percent.

In other words, stocks tend to go up regardless of what they do during the first five days of the year.

Hulbert explains:

"Given the variability in the year-by-year results, the differences summarized in the accompanying table are not significant at the 95% confidence level that statisticians often use to conclude that a pattern is more than a fluke. Notice carefully, however, that even if you were to insist that the differences in the accompanying table were significant, you'd still not have much to write home about: Whenever the first five days of January are up, there have been only marginally higher odds of making money over the rest of that year."

Similarly, for the month of January, looking back to 1896 he found that if the Dow was up in January it would rise 73 percent of the time from February through December and the average gain would be 7.68 percent. And if it was down in January, then it would rise 52 percent of the time from February through December with a gain of 3.78 percent.

Other top Wall Street minds have weighed on this as well. Art Cashin at UBS has said the first five days of trading have a more "discernible record" than the first day. "According to the very helpful Traders Almanac, the last 39 times the market rose in the first five days, it closed up on the year 33 times (84.69%).  So stay tuned."

Hulbert's advice: Instead of chasing seasonal patterns, look for bigger picture influences like corporate earnings, political debates, or the risk of a recession.

Read the entire piece at Barron's >



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