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Simon Maierhofer

Jan. 1, 2017, 4:07 p.m. EST

This popular composite stock-market indicator bombed in 2016

Should investors ignore it or explore it in 2017?

By Simon Maierhofer


Going into 2016, this popular composite indicator had a 65%-74% accuracy rate. It bombed in 2016. Should investors ignore or explore it for 2017?

This indicator is made up of three components: the Santa Claus rally (SCR), performance the first five trading days of January (F5D), and the January barometer (JB). Invented and popularized by the Stock Trader's Almanac, the indicators basically act as barometer (as the indicator goes, the goes the following year).

As the table below shows, the SCR, F5D and JB were solidly bearish for 2016, and the Stock Trader's Almanac anticipated the following outcome:

"A mild bear market is still on the table at this juncture. What exactly does this mean? We do not anticipate another 2008-style total global meltdown; we envision something more akin to the 1980-1982 bear market that ended the last secular bear market. Back then DJIA shed 27.1% in 622 calendar days."

The Dow Jones Industrial Average (DOW:DJIA)   climbed 13.42% in 2016, while the S&P (S&P:SPX)  ained 9.54% for the year.

Does this mean we should ignore this seasonality-based indicator?

No. Any indicator with an accuracy rate of around 70% deserves a measure of attention. But indicators should also be viewed in context. The bigger the context, the better.

For example, since 1970, all three indicators have been negative only five other times. This bearish trifecta “killed” the market in 2008, but it hasn't been consistently bearish, as the table below shows.

This next chart (published in the Profit Radar Report's 2016 S&P 500 Forecast ) shows the average performance of years with January losses of more than 5% (1970, 1977, 1978, 1990, 2000, 2008, 2009).

Based on history, there was a good chance for a strong rally from the first quarter to the third quarter despite a historically weak January.

When casting an even wider net (one that extends beyond seasonality and performance patterns), a net that includes investor sentiment, technical analysis and money flow, it became clear that 2016 actually looked quite bullish (see projection below published in Profit Radar Report's 2016 S&P 500 Forecast ).

In summary, no indicator is right all the time, and even otherwise reliable indicators will be terribly wrong at some point.

Many financial headlines and research articles focus on only one indicator, but the key to successful investing is indicator diversification.

Monitoring a composite of indicators neutralized the bearish message of SCR, F5D, JB in early 2016 and kept investors on the right side of the trade. This report features a comprehensive S&P 500 forecast based on multiple indicators, such as investor sentiment, technical analysis, money flow and seasonality.

Link to MarketWatch's Slice.