Strong January, Strong 2012?

The S&P 500 index posted a total return of 4.48% for the month of January.  This marked the best performance for the U.S. stock market in the month of January in more than a decade.  Additionally, the Dow Jones Industrial Average itself rose 3.55% for the first month of the year.  It is fair to surmise that we are certainly off to a good start in 2012.

Some interesting historical observations based on this data are as follows:

  • According to the “January Barometer Effect”, which was created by the Stock Trader’s Almanac in 1972, as the S&P 500 index goes in January, so goes the year.  This purported stock market effect has been correct 89% of the time since 1950.  Further, stocks have finished lower for the year only 3 times after posting positive gains in January since 1950 (i.e. 60 + years).

  • According to the Stock Trader’s Almanac, the stock market has posted double-digit annual gains all 18 times that it has increased by 4% or more in January.

  • According to our own bullish/bearish market sentiment indicator at Hennion & Walsh, if the S&P 500 index holds above 1,325 today, it will have crossed its 200 day moving average + 5% (our self-imposed margin of error for more accurate readings).  According to our research, and data provided by Yahoo Finance, since 1950, every time that the S&P 500 has crossed its 200 day moving average + 5% (i.e. a “Buy” signal) , the S&P 500 increased afterwards.  When we measured the cycle beginning with each buy signal and ending with each subsequent sell signal, according to our criteria, the average increase in the S&P 500 over each “buy” to “sell” cycle was approximately 42.7%.

We are encouraged by the strong start to the New Year and some of the recent economic data reports.  Yet, with all of this mounting optimism, we are mindful that the first half of 2012, at a minimum, is still likely to be volatile as headwinds still persist in our view.  Some of these headwinds include:

  • The European debt situation not being resolved to a level that the market is comfortable accepting

  • U.S. political uncertainty leading up to this Fall’s Presidential election

  • Potential escalation of ongoing Middle East (Ex. Iran, Israel, Syria) and Far East (Ex. North Korea) tensions

  • Skepticism around sustainability of needed U.S. economic recovery growth rates

For these reasons, we believe that it is imperative that individual investors take this opportunity to sit down with their financial advisors to re-visit, and update as necessary, their asset allocation strategies in light of the outlook for the market and economy in 2012.  At Hennion & Walsh, we are anxious to implement the changes to our target-risk model portfolios associated with our proprietary annual reconstitution process so that we can better position our clients to withstand volatility when it returns to the market and to benefit from the modest growth and mounting optimism that we expect to continue throughout 2012.