Written by: Sam Stovall
Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: In this week’s Sector Watch, you pointed out that the S&P 500 was up nearly 8% for the month of January, placing it among the top five best-performing Januarys since World War II. A good first month historically bodes well for the market. How has the S&P 500 typically performed on the back of a strong January?
Stovall: I think many people on Wall Street were first introduced to the adage, “as goes January, so goes the year,” by The Stock Trader’s Almanac. The implication is that if you have a strong start to the year, then it would likely continue for the rest of that year. Going back to World War II, if the S&P 500 was up in the month of January, it continued to rise 83% of the time in the remaining 11 months of the year. Also, the average 11-month return was—surprisingly—11.1%.
Furthermore, if you had a down January, the market gained only 1.3% in the remaining 11 months. So, yes, January has been a pretty good indicator or early warning signal, if you will, of what could happen during the rest of the year.
EQ: At the sector level, you also laid out the groups to watch for this year’s January Barometer Portfolio. Can you refresh our readers on how the strategy works and how it’s done against the market in previous years?
Stovall: Yes, it’s a very simple strategy with the premise being, as goes January for the market, so goes the year. If we looked at the three best-performing sectors in the month of January, and then held them for the coming 12 months—not 11 months, because you want favorable tax treatment—since 1990, this strategy returned 9.0% on a compounded annual growth rate basis versus 7.5% for the S&P 500. Also encouraging is the batting average. The frequency with which this strategy beat the S&P 500 was 66%.
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For those who are interested in being total contrarians, the three worst-performing sectors in January gained only 5.6% and outperformed the market only 48% of the time. So, it usually is best to stick with the winners, either on a 12-month lookback, or in the case of January, a one-month lookback.
EQ: This current market rally really started at the tail end of last year. What are some of the catalysts helping the S&P 500 to recover from the Dec. 24 low?
Stovall: I think it is just how low valuations got. The S&P 500 fell to 14.07 times forward 12-month earnings. That pretty much rivaled the average low P/E during each of the prior 10 pullbacks and corrections since this bull market started in 2009. Also, if you look at the relative strength between the S&P 500 index price with its projected 12-month earnings, it also got to a low reading that was only surpassed by the reading found in October 2008.
I think it was primarily because of the washout of valuations, as well as investors coming to the conclusion that we are not headed for recession, and chances are there will be a positive resolution to this trade disagreement.
EQ: From a technical perspective, the S&P 500’s recent push higher cleared a key resistance level at 2,674, shifting the bias from the bears. How much room do bulls have before facing the next key resistance?
Stovall: Well, actually not much time at all. The S&P 500 has already reached the resistance level starting at the 2,714 area, according to i10Research. So, right now the feeling is we probably are bumping up against resistance and will probably need to digest some of the recent gains. However, they also remind us that support is not too far below us at between 2,625 and 2,645.
So, right now they would say that we are in a rotational bias, not a bullish bias, and the S&P 500 would have to fall below the 2,625 area in order to re-establish a bearish bias. The market is likely to be digesting the gains here, and so investors would be encouraged to buy the dips.
EQ: Thank you Sam.
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