Technical analysts closely watch the January Barometer for a read on the rest of the year.
There’s a good reason for that. When January closes higher, the next 11 months have been higher 87% of the time. Down Januarys always coincide with bear markets or, at best, flat performance.
Now it’s time to look at what the indicator tells us about the rest of 2018.
The S&P 500 gained more than 5% in the first month of 2018. This is the 13th time the index gained at least 5% in January.
January’s big gain this year points to a potential double-digit bull market.
The chart above shows the average gain after a month like that is 15.8%. The only time the next 11 months were down was in 1987. That year, the index gained 13.2% in January.
Excluding 1987, the typical year with a big January includes a pullback of about 8.6%.
Expect a Bull Market in 2018
Now, the January Barometer isn’t just a random indicator. January shows how much pent-up demand exists for stocks.
Many investment managers hold off on new investments near the end of the year. They do this because they are trying to safeguard their performance.
If they had a good year, they want to preserve a big bonus rather than take risks. If they had a bad year, they know they start with a clean slate in January, so it’s tempting to wait and jump into the big winners at the start of the year.
After a strong January, their confidence increases. Investment managers start chasing the best stocks. Fear of missing out takes hold. That fuels additional gains for the rest of the year.
With a high likelihood of a major bull market through December, now is the time to invest aggressively.
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