January 9, 2019 / 1:00 AM / 8 months ago

RPT-COLUMN-Back to school, keep an eye on the "5-Day Rule": McGeever

(Repeats Jan. 8 article with no changes to text)

By Jamie McGeever

LONDON, Jan 8 (Reuters) - The holidays are over, New Year resolutions have been made and broken, and traders, investors and money managers are putting their annual investment plans into practice.

How will 2019 pan out? No one knows for sure, certainly not this early in proceedings, but there are rules of thumb around the month of January that can offer clues as to what lies ahead.

The S&P 500’s so-called “5-Day Rule” holds that if the market rises in the first five trading sessions of the year, it will end the year higher. Broadening that out, if the S&P 500 ends January in the green it will end the year in the green too.

The bulls will be taking heart: after the first four full trading sessions of 2019, the index is up 1.7 pct, so it will require a pretty hefty fall to reverse all that in one day. But given recent volatility, that’s not out of the question: the market has had 13 such daily falls in the last three months.

But how much store should we put in these hypotheses? Are they useful guides, or a load of mumbo jumbo?

Before digging into the stats, it’s worth pointing out the obvious: the S&P 500 and stock markets across the developed world usually rise anyway. Population growth and near-uninterrupted GDP growth keeps investment flowing into equities, ensuring nominal stock prices rise over the long term.

Since the S&P 500 was reconstituted in 1957 to comprise 500 stocks, it has risen 45 of 62 years, meaning the market rises 73 percent of the time regardless of how it performs in the first five days of the year or in January. The average annual gain in those up years is 15.8 percent, not adjusted for inflation.

The 5-Day Rule, however, has a success rate of 80 pct. That is to say, in the 41 years where the market has risen in the first five trading days of January, it has ended the year higher in 33 of them. The exceptions are 1966, 1973, 1974, 1990, 1994, 2002, 2015 and 2018.

So far this year, with four full trading sessions completed, the S&P 500 is up 1.7 pct. Barring a complete reversal of that on Tuesday (Jan. 8), statistically there’s an 80 pct chance it will be an up year overall, according to the 5-Day Rule.

Jim O’Neill, ex-chairman of Goldman Sachs Asset Management who coined the term “BRICs” for the world’s leading emerging markets, was a keen proponent of the 5-Day Rule in his Goldman days, although he admits there’s no obvious fundamental economic or technical market reason why the theory should hold water.

“But the statistical success is strong enough to not ignore,” O’Neill says.

The statistical evidence for whether an upswing in January bodes well for the year as a whole is even stronger. Since 1957 the S&P 500 has risen in January 37 times, of which 32 have gone on to a positive annual performance.

That’s a success rate of 86 pct. The five exceptions have been 1966, 1994, 2001, 2007 and 2018. Last year, in particular, was a massive head fake. The market rose 5.6 pct in January 2018, its best start to a year since 1997, yet registered its first down year in a decade.

Is the correlation as strong when the market falls in the first five days and first month of the year as it is when it rises? In short, no.

Since 1957, Wall Street’s leading index has fallen in the first five trading days of January 21 times but has posted an annual decline in only nine of those years, or only 43 pct of the time.

Again, the monthly performance is a better indication of annual performance, but only slightly. There have been 25 “down” Januarys since 1957, of which 13 have ended up in annual declines. That’s a 52 pct “success” rate.

There’s no denying the overwhelming sense of bearishness with which investors have gone into 2019. Worries about global growth, the U.S. yield curve, potential for U.S. recession, global trade wars and continued Fed tightening have darkened the outlook for stock market performance and returns this year.

But maybe the pendulum has swung too far.

The last few days have seen a blockbuster U.S. employment report which should dampen any recession fears for now, and dovish remarks from Fed chair Jerome Powell that suggest the Fed will take its foot off the tightening pedal this year.

In the meantime, watch for Tuesday’s close on the S&P 500.

By Jamie McGeever Editing by Mark Heinrich

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