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Posted on 12 April 2011 | 4,188 views

Top 10 Worst January Stock Market Declines

Of the worst January stock market declines since 1928 on the Dow Jones Industrial Average, it’s a tie on how the stock market performed throughout the year after a rough start, indicating you really can’t gage how the stock market will end the year with such a disappointing start to the year.

But, other market pundits have a different view when using the S&P 500 in their January Indicator data.

The purest form of the “January Indicator” predicts that equity market gains in the month of January will continue to the end of the year. Conversely, losses in January predict that results for the full year will be negative.

In 1972, Yale Hirsch completed a study claiming that, “As U.S. equity markets go in January, so go equity markets for the remainder of the year”. Analysts have devised many equity indicators like this based on calendar dates.

Data during the past 60 years for the S&P 500 Index confirms validity of the indicator. Out of the 36 years when January ended with gains, 33 ended with year end gains averaging 19.29 percent. That’s a 92 percent success rate. The remaining three years averaged losses of 9.22 percent. Conversely, the 24 years with losses in January recorded 13 years of negative returns averaging a decline of 14.92 percent. That’s a 54 percent success rate. The remaining 11 years showed gains averaging 8.88 percent.

The effect is equally profound when gains are recorded by the S&P 500 Index in the first five days of January. Gains by year end were recorded in 32 of 37 years with an average gain per period of 17.79 percent. That’s an 86% success rate. The remaining five years averaged losses of 12.38 percent. On the other hand, the 23 years that had negative returns in the first five days of trading recorded 11 losses by year end with an average decline per period of 14.52 percent. The rate of success under this scenario was virtually random at 48%. The remaining 12 years with losses in the first five trading days averaged gains of 13.73 percent by year end.

Results conclude that years that start positively show a greater probability of finishing positively. Outcomes are less significant under the opposite scenario when equity markets start the year on a negative note.

What about this year? The S&P 500 Index after the first five trading days in 2011 showed gains of 1.10 percent. Stay tuned for the close on January 31st as a predictor for 2011.

The Worst DJIA Index January Declines …

January-09    -9.64% for the month | up 23.28% for the year
January-60    -9.11% for the month | down 1.09% for the year
January-39    -7.65% for the month | up 4.15% for the year
January-70    -7.57% for the month | up 11.31% for the year
January-90    -6.28% for the month | up 1.64% for the year
January-68    -5.80% for the month | up 9.35% for the year
January-41    -5.64% for the month | down 11.87% for the year
January-77    -5.27% for the month | down 14.82% for the year
January-00    -5.13% for the month | down 1.41% for the year
January-08    -4.83% for the month | down 44.14% for the year

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