By James Dines
The Dines Letter
In the 61 Januarys since 1950 the Dow-Jones Industrial Average (DJI) has risen 39 times and declined 22 times, bullish around five out of eight times (64%).
Action in the first trading week of January, and the month as a whole, both appear to have some predictive value for the overall market.
A. S&P 500: There is a correlation between the rise of the S&P 500 in its first 5 trading days of the year and its rise for the whole year. In the last 37 Januarys, whenever the S&P 500 rose in its first five days, the S&P 500 index rose for the year 32 times, for an 86% consistency. In the 5 times it did not work, meaning when the S&P 500 closed lower for the year, it is interesting to note that 4 of those years were extraordinarily bearish: 1966 and 1973 were Vietnam War years, 1990 was the year of "Desert Storm," and 2002 was the aftermath of 9/11. However, unexpectedly, when the first 5 days of the S&P 500 resulted in a decline, as they did 23 times since 1950, the year-end results were split almost 50:50, hence no correlation. So a rising first week is the action to watch for: the dates are Jan 3 to 7 in 2011. Those are the odds.
B. Dow-Jones Industrial Average: Our Research Department found that in the 24 times in the last 33 Januarys that the first 5 days were up, it led to Dow up years 73% of the time, less impressive than the S&P 500's 86%, but nonetheless meaningful. Similar to the S&P 500, when the Dow's first five days ended lower (a total of 14 times since 1961), there was no correlation to its year-end result, and is not useful as a guide. Conclusion: only rising first weeks show a bullish correlation.
C. Popularly known as the "January Barometer," the entire month of January has gained prominence as one of the market's foremost bellweathers. Briefly, whichever direction markets go the entire month of January often points to the direction of the entire year. For example the S&P 500 shows an almost-perfect match between its January performance and its end-of-year performance in every odd-numbered year, 31 straight from 1939 to 1999! (This correlation was broken in 2001, 2005 and 2009.) On even-numbered years only, we noted 9 errors out of 30 years, 70% were predictive.
Turning to the DJI, there was a match between its January and end-of-year performance in 26 of 30 odd-numbered years (87% of the time). In even-numbered years, 22 out of 29 (76%) moved together, also accurate. Adding another dimension to our comparison, records show that of the Dow's 23 declining Januarys, 16 likewise ended in declines (90% of the time). For the S&P 500's record, of 24 down Januarys, 14 were followed by down years (58% of the time).
In conclusion, an up January would be bullish for the market, especially if the first 5 trading days were up also. As to January's predictive ability, the S&P 500 has proven especially dependable in odd years but for even years the DJI has the better odds. If both the DJI and the S&P 500 decline this January, the DJI would be more likely to end lower for all of 2011.
D. As for the Dines Gold Stock Average (DIGSA), 43 Januarys since 1968 included 25 rises, 17 declines, and one neutral, for a 60% bullish record, confirming the validity of Dinesism #9 (DIRGS), the Dines Rule of Gold Seasonality.
Interestingly, the Dines Silver Stock Average's (DISSA) down Januarys show a remarkable accuracy ratio in terms of having predicted silver's direction for the rest of the year. Specifically, of the 12 Januarys in which DISSA was a downer, no fewer than 9 of them (75%) resulted in down years for DISSA. On the other hand, the rising Januarys for DISSA only worked 60% of the time, with 18 up years out of the 30 Januarys - not statistically helpful.
In conclusion, January is usually a bullish month for gold and silver shares, but if DISSA declines in January that would be a serious negative factor for silver-mining shares for all of 2011. As always, note that there are no stock-market guarantees, only the percentage used in our "educated guesses."
Editor's Note: James Dines is editor of The Dine's Letter, P.O. Box 22, Belvedere, CA 94920. 1 year, 17 issues, $295.
Mr. Dines predicts much higher gold prices ahead, for the reasons carefully delineated in his brand-new book, Goldbug! The book not only provides unique insight into gold investing that only Mr. Dines can provide, it also offers historical perspective and little-known details. Order direct www.DinesLetter.com.
