A Better Market Ahead?

History suggests that February could see an extension of January's losses. S&P advises that you hold on for gains beyond this month

By Joseph Lisanti

February frequently is a weak month for the stock market. Over the history of the S&P 500, the index has declined in the second month of the year almost 49% of the time.

Some people believe that old data are not really relevant today. They contend that what happened over a period of more than three-quarters of a century can't be useful information in the present market, which is very different from, say, the stock market of the 1950s. Yes, the market has changed, but recent numbers for the month are remarkably consistent with the historical record. Consider that the "500" declined in five of the 10 most recent Februaries.

One possible explanation for the poor showing typical of February is that traders take profits resulting from the usually strong advances in December and January, both traditionally good months for stocks. Historically, the "500" has risen in December 75% of the time, with an average gain of 1.4%. Sixty-five percent of Januaries have seen stock prices rise, with an average index advance of 1.5%.

The January just completed was far from typical, as the S&P 500 slid 2.5%. If history is a guide, February could likely follow. Since the late 1920s, when the index has declined in January, February has also been negative 64% of the time.

Paul Cherney, Standard & Poor's chief market analyst, has taken a closer look at Februaries since 1958. He found that when the "500" was down in January, 76% of the time the following month's highest close occurred on or before the 11th trading day. This year, that falls on February 15.

Will February join January in the down column? While short-term movements are difficult to predict, another down month appears to be a distinct possibility. Even so, we expect a somewhat stronger showing for equities over the course of 2005 because we see continued economic growth, record corporate profits, and only moderate increases in short-term interest rates.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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