Weekly Update

The January Trifecta Indicator

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Published January 27, 2023


Back in January 2013, the Stock Traders Almanac created the “January Indicator Trifecta” by combining three indicators that occur over a five week period: 1) the Santa Claus Rally indicator, 2) the First Five Days Early Warning System and 3) the full-month January Barometer reading.

When all three of the “January Indicator Trifecta” readings are up the S&P 500 has closed the year with a gain 90% of the time, 28 of 31 years, with an average gain of 17.5%.

When any of the three are down the year’s results are reduced.

When all three are down, the S&P is down almost half the time (down 3 of 8 years with an average loss of -3.6%).

The first indicator to register a reading in January is the Santa Claus Rally. The seven-trading day period begins at the open of December 27 and ends with the close of trading on January 4. Normally, the S&P 500 posts an average gain of 1.3%. The failure of stocks to rally during this time has tended to precede bear markets, or times when stocks could be purchased at lower prices later in the year.

The First Five Day Early Warning System says if stocks end the first five trading days of a new year with a gain, the market should see net gains over the course of the 12-month stretch. Since 1950, the S&P 500 has logged net gains during the first five days of the year a total of 47 times. Of those 47 instances, the index ended the year up in 39 of them. That’s an 83% success rate for the first five days theory.

The January Barometer simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20. When all three of these indicators agree it has been prudent to heed their call.

As of this writing, the Santa Claus Rally indicator produced a very modest, but nonetheless positive, result. January started strong to provide us with a positive result on the First Five Days indicator. So, two out of three of the indicators are positive so far. That leaves only the January Barometer ahead of us. Thus far, January is delivering a gain with only two days left in the month.

Here is the annual return data for the Trifecta. We see that February tends to offer mixed results regardless of the Trifecta. But the remainder of the year is overwhelmingly positive with only two “failures” (1966 and 2018) with one of those (1966) only barely positive across the three Trifecta readings.

S&P 500 January early indicator trifecta - 3 positives


Market Update

Stocks romped upward by +1.2% Monday led by a flurry of buying in semiconductor shares. The influential growth-stock sector has been whipsawed over the past couple of years as pandemic supply chain issues initially created a large shortfall of chips. The subsequent ramp-up came as demand leveled out, leading to an inventory bubble in the face of a bearish stock market. Nvidia rose almost +8% Monday as an example of the demand for the sector’s big names. Stocks held flat Tuesday amid a deluge of earnings reports. The first report from the tech/consumer heavyweights came out Tuesday evening with Microsoft missing earnings estimates and offering a gloomy outlook on revenue. But Wednesday’s opening weakness in the stock found buyers to lead stock indexes to a second straight flat finish. A better-than-expected report on domestic economic growth Thursday kept the mood positive as did a bullish report from Tesla. The car company’s shares have fallen from $400 to $100 over the past year. The Thursday earnings report accelerated a 2023 rally in the stock and helped the broad market to a +1.1% gain. The Nasdaq added another +1% Friday despite a weak report from Intel. The recently-beleaguered tech/consumer sector continued to find buyers across the board. Markets were helped by an only modest tick upward in a report on inflation, thus continuing the narrative that interest rates have peaked. The general tone from earnings reports this week was of only moderate weakness ahead, so feeding the idea of a mild recession.

A big week for stocks as the S&P 500 (SPY) cleared its weekly downtrend line and closed above 4000 for only the second time since September. The index rose +2.48% for the week. The Nasdaq 100 (QQQ) added a hefty +4.79%, while small-cap stocks (IWM)  posted a +2.43% return.

Warm wishes and until next week.