When the S&P500 has a net positive gain in the first five...

When the S&P500 has a net positive gain in the first five trading days of the year, there is about an 86% chance that the stock market will rise for the year, it has worked in 31 out of the last 36 years (as of 2006). The five exceptions to this rule were in 1966, 1973, 1990, 1994, and 2002. Four out of these five years were war related, while 1994 was a flat market. As history suggests, the markets average nearly 14% gains when the January Effect is triggered.
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On the flip side of the coin, when the first five days of January are lower, there is no statistical bias of the market, up or down. It is anyone's game at that point. Not a very reliable indication.​

Statistical response to an UP or DOWN January​

A down January is a bad omen for the stock market. Yale Hirsch of the The Stock Traders Almanac suggests that since 1950, every down January in the S&P500 preceded a new or extended bear market, or in some cases, a flat market. They go on to further suggest that down January's are followed by substantial declines averaging -13%.​

January Effect or December effect?​

The publicity of the January Effect has watered down the potential net gains from it over the past few years. In fact, history suggests that small cap stocks far outperform large caps during the middle of December. To avoid the sharp mark up in shares in the beginning of January, institutional traders have started accumulating many beaten down small cap stocks in December to get a head start on the January Effect. This shift has been seen in the markets and December has also become a very strong year for the stock markets, also known as the December Effect.​

Small Cap Trading Example of the January Effect​

There are still debates between finance experts if the January effect anomaly can be properly traded. Traders constantly ask themselves “Is there a January effect?” This is something you need to decide for yourself.
Since some investors do not find a logical explanation behind the January effect, they prefer not to put an emphasis on the January price move when making future decisions.​

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