In his daily note, UBS floor guy Art Cashin discusses the mystical, market powers ascribed by traders to the first five trading days of the year.
Wall Street lore is filled with patterns, both real and imagined, that impact or affect the trading in the opening week of the year. The foundation of many assumptions is that “new money for the NewYear” (pensions, et. al.) is ready to flood into the market and lift prices.
Even though the pre-opening futures make that look “dead on”, history is not so re-assuring. Here’s what the sharp- eyed veteran, Jim Brown, noted in this Premier Investor Newsletter:
Of the last 15 years there have been an almost even number of up days and down days (8-7) on the first trading day of the year. It is hard to see a trend there. If we extend it to cover the first week it remains a dead heat. However, if we look at the end of January compared to the first day of the year the Dow is down 10 times and up only 5. Looking even closer there was a significant sell off in January 12 out of 15 years. In some cases they lasted only a week or so but they were normally significant program driven declines. Once the year end money was invested a sharp selloff appeared to capture profits. I speculate the hedge funds were invested ahead of the retirement fund pop for mutual funds and the hedge funds took profits when it was over. The pattern is very well defined.
Jason Goepfert, of SentimenTrader found a pattern triggered by the kind of air-pocket selloff we saw on Wednesday and a more positive beginning to the New Year.
The reason that there’s so much attention to how the year opens is the First Five Days pattern, researched by Yale Hirsch of the “Stock Trader’s Almanac”. Of the 38 most recent years that the first five days resulted in a gain, the year, itself, was up 86.8% of time. The pattern is a bit less successful when the first five days are down.
That’s got a 50/50 yearend predictive value. The “First Five Day” pattern is one of the most widely discussed, maybe right behind the Super Bowl pattern.
For more on the “January effect”, see here.