We're only a couple of weeks into 2013, but the S&P 500 Index (SPX) (SPY) is already up 3.24% on the year -- the performance over the next month will be important as to the odds of the year as a whole being strong -- see our analysis below and from last year.
Last year we discussed the "January Effect" in the stock market, whereby some believe that the performance during the first month of the year gives a good indicator as to the total year's performance.
Our data looking back at 40 years indicated that there actually is a nice correlation between the market's first 6 weeks of the year and the subsequent yearly performance.
The first 6 week's stock market performance as to the how the year finishes had a 75% correlation going back to 1972 -- now with 2012's results it is up to 31 of 41 times this basic indicator was correct.
A stronger indication was that when the market was up in the first 6 weeks, it only ended lower 2 times in 40 years (1994 and 2011) -- and both of those years had a yearly net loss of less than 1.5% (basically flat). This indicator was 21/23 correct (91.3%) as of last year, now it is 91.7% with 2012's "correct" result.
Including updated dated from 2012, the average gain of the 22 "Up 6 Weeks, Up Year" years was 6.00% for the first 6 weeks and 18.93% for the year -- this gives a "leverage factor" of 3.16 for forecasting the remainder of the year.
The leverage factor is down a bit due to 2012's data, where a factor of 3.24 gave us a 2012 SPX projection of 1560.19 -- the actual SPX high for 2012 was 1474.51, which was close but 5.5% lower. Not too shabby overall, when you also consider the 75% and 91% odds of moving higher (which it did).
Another key for 2013 will be if we are very strong to start the year, 5% to 10% higher by the end of the first 6 weeks -- that is a smaller data sample, with 9 examples since 1972. But in 8 of 9 samples (88.9%), the market ended between 13% and 31% higher on the year (the low data of 13% occurred last year) -- the average yearly gain was 23.7% of the 9 correct samples (21.1% in all samples).
Below is part of last year's article (not updated or modified):
"Here is the bulk data below, which shows the gain/loss for the first 6 weeks of the year and for the entire calendar year. Positive gains are shown with "W", Losses with "L":
SPX Data Since 1972
The bolded "W/L"s indicate the instances where the first 6 weeks did not correlate to the full year performance. There were only 10 times out of 40 where this occurred — in other words, 75% of the time the performance in the first 6 weeks foretold what the overall market gain/loss would be for the year.
In addition, there were only 2 instances where the market was UP in the first 6 weeks, but ended the year down — (1994 and 2011) — and both of those years had a net yearly loss of less than 1.5% (basically flat). So this "Up beginning, Down Year" result is only 2% of the overall sample size and 8.6% of the "Up beginning" samples.
Another way of stating that is that 91.4% of the time over the past 40 years, an Up first 6 weeks resulted in an Up year. Thus the past data indicates that the strong open to 2012 is very likely to result in a market gain for the year or a "flat" market in the worst case scenario.
Now let's take a look at the 'leverage' that a strong year open means for the full year performance … the average of the 21 "Up 6, Up Year" years was 5.93% gain for the first 6 weeks and 19.20% gain for the year. This gives us a "leverage factor" of 3.24. Projecting this to the 7.39% gain the SPX has achieved thus far in 2012 (Friday's trade action notwithstanding), this gives a projected gain for the year of 23.94%.
That would push the SPX to a potential year end target of 1560.19. This is certainly a higher number than many analysts are forecasting. But actually, if you take a look at the SPX Weekly Chart below, this would take us right back to the highs of 2007 just before the global economic crisis hit.
SPX Weekly Chart
So you can see that this potential upside target for 2012 would in fact basically retrace all of the losses incurred since 2007. This is also a logical resistance/pause/reversal area for the markets.
Since we've had such a strong gain in the first 6 weeks, let's also take a look back at the most similar years since 1972 to see how 2012 may shape up (if history is any guide). There were 7 years where the market gained between 5% and 10% in the first six weeks:
Note that the similar years (barring 2011) all had market gains of 19% to 31% on the year, which also falls in line with the leverage forecast calculated above."
It's certainly prudent to check back on this accurate indicator once a bit more time in 2013 has passed to see if we are in store for another strong stock market performance year.