January's Glum Precedent for the Year

A fabled market indicator argues that gains in the first month set the trend for the next 11. This year, the omens weren't good

By Sam Stovall

Can you tell if the market will finish the year up, based on how it began? That's the intriguing premise behind the "January Barometer." That market predictor, made famous by Yale Hirsch's Stock Trader's Almanac, says if the S&P 500-stock index rises in January, the index usually goes on to post a full-year gain.

While some first impressions can be misleading, I think this particular market predictor has some merit. Investors often look upon Jan. 1 as a day of renewal. To many of their eyes, the prior year's reasons to be nervous about the economy, earnings, and individual equities can vanish with the dawn of the new investment calendar. (Of course, some nagging worries, like the prospect of a U.S. war with Iraq, aren't so easily put aside.)

The January Barometer has had a pretty good record. Of the 21 times since 1970 in which the S&P 500 ended January with gains, the market has gone on to post positive full-year results 18 times. That's a batting average of nearly .860. What about this year? Well, investors may not like the reading of the barometer for 2003. That's because the S&P 500 dipped 2.7% in January.

FRONT RUNNERS.

  Since the January Barometer's performance record has been so good in terms of the overall market, Hirsch asked me a few years ago if the same could be said for industries. Would the best-performing industries during the month of January, as a group, go on to beat the market during the remaining months of the year? I found the answer to be a resounding yes.

Since 1970, the 10 industries within the S&P 500 that posted the best performance during January as a group went on to outperform the S&P 500 during the remainder of the year 73% of the time (it worked again in 2002, as well as each of the past five years). I call those 10 industries -- each represented in the table below by the largest company in the industry -- the January Barometer Portfolio. Since 1970, the JBP's average gain for the 11-month period following January was 14.6%, vs. an average 6.2% advance for the S&P 500 (dividends were not included).

And even though the S&P 500 recorded negative results 12 times, the JBP fell only nine times. Indeed, during 2002, when the S&P 500 fell 22.2% from February through December, the JBP declined 18.8%.

Visit the indexes area of www.standardandpoors.com to see the other companies in these industries in the S&P 500 index. Please keep one thing in mind as you contemplate this portfolio (and as you consider any investment, of course): Past performance is no guarantee of future results.

Top Industries and Companies in the 2003 January Barometer Portfolio
Industry Jan. % Chg. Largest Co.
Computer Storage & Peripherals 15.1 EMC (EMC)
Internet Software & Services 11.3 Yahoo (YHOO)
Broadcasting & Cable TV 11.1 Comcast (CMCSA)
Internet Retail 10.8 eBay (EBAY)
Diversified Metals & Mining 10.4 Phelps Dodge (PD)
Office Electronics 9.9 Xerox (XRX)
Wireless Telecom Svcs. 5.0 AT&T Wireless (AWE)
Biotechnology 4.9 Amgen (AMGN)
Homebuilding 4.8 Centex (CTX)
Construction & Engineering 4.7 Fluor (FLR)
S&P 500 -2.7

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of January 31, 2003.

Industry/Sector Largest Company (Market Cap.) S&P STARS* Rank
Apparel, Accessories & Luxury Goods/Consumer Discretionary Quiksilver (ZQK) 5 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR) Not Ranked
Gold/Materials Newmont Mining (NEM) 4 STARS
Housewares & Specialties/Consumer Discretionary Newell Rubbermaid (NWL) 5 STARS
Managed Health Care/Health Care UnitedHealth (UNH) 4 STARS
Marine/Industrials Alexander & Baldwin (ALEX) 3 STARS
Metal & Glass Containers/Materials Pactiv (PTV) 4 STARS
Oil & Gas Drilling/Energy Nabors Industries (NBR) 5 STARS
Oil & Gas E&P/Energy Apache (APA) 5 STARS
Photographic Products/Consumer Discretionary Eastman Kodak (EK) 1 STAR
Publishing & Printing /Consumer Discretionary Gannett (GCI) 5 STARS

*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief investment strategist for Standard & Poor's

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