This Alarming Market Indicator is 87% Accurate. Here’s What It's Predicting for 2016...

“As goes January, so goes the year.”

There’s a classic market adage for you this fine morning. It needs no translation.

And if that old saw holds up, 2016 will be a bust for stocks…

The S&P finished the first month of the year down a cool 5% overall. That was the worst January in seven years. That’s right—the S&P 500 hasn’t dropped this much in January since 2009.

The only bright spot was this past Friday, the last trading day of the month. The major averages turned in a big rally—something as rare as hen’s teeth so far this year. The S&P jumped nearly 2.5%. Ditto for the Dow and the Nasdaq. If it wasn’t for Friday, the month would have been even worse.

Now about that adage I opened with… keep it in mind because this January Barometer has a darn good track record.

“The indicator has registered only eight major errors since 1950 for an 87.7% accuracy ratio,” explain the folks in charge of the 2016 Stock Market Almanac. “Full years followed January’s direction in 12 of the last 16 presidential election years.”

2016 was a big election year last I checked. So hold onto your hairpiece—this year could turn out to be one hell of a ride. Yes, Friday’s bounce was a nice breather. Heck, 483 S&P stocks finished the day higher. That’s a welcome change from all the red spots that have dotted our screen for the past 30 days. But if history—and the January Barometer—has anything to say, we could be in for another rough year for stocks.

But it’s not written in stone. Let’s take a quick look at how recent history has reacted to this indicator…

The S&P 500 dropped more than 3% last January. But 2015 ended near breakeven. Not great but not awful. 2015 was a painfully choppy year for stocks—something that the yearly tally just didn’t reflect.

Then there’s 2014. The S&P dropped more than 3.5% the January before last. But this year was different. The January drop didn’t faze the big board, which finished 2014 with a gain north of 11%. Bottom line: You can’t simply rely on any one indicator like this. Markets are just too complicated.

January Brings the Snow

So here we are entering February…

There’s no shortage of problems for the worrywarts of the world to dwell on today. Oil’s in the gutter, the global economy is stammering, and no one knows for sure what the Fed will do with interest rates this year. That’s enough to keep the jitters going.

There’s a lot of uncertainty out there. And I’ve said it before but I need to say it again: Don’t feel like you always have to be doing something—especially in this cranky market. There’s no use in going for the quick-hit swing trades in this environment. You’ll probably swing and miss.

To kick off February, what we need to look for is follow-through in the major averages. We want to see stocks build on Friday’s rally and give investors some indication that the big move will turn into something more than a one-hit wonder relief rally. One positive trading day is great. But as we know all too well, one day does not a trend make…

Another important market characteristic we need to watch is leadership. As we barrel into the new month, which names or sectors will jump to the front of the pack? Ideally, we’d like to see the riskier groups of stocks acquire some momentum. The Russell 2000 small-cap index jumped 3.2% Friday, besting the major averages. That’s a good start.

S&P futures are already sneaking well into the red early this morning. While that’s probably a better option than a big gap higher followed by a morning fade, we’d like to see investors jump on stocks this morning and start digging us out of this hole. Gotta start somewhere…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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