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Is There Something to the “January Indicator” – Or Not?

Also – insights into the late Paul Macrae Montgomery’s Magazine Cover Indicator

by Bob Stokes
Updated: January 06, 2022

As mentioned before in these pages, Elliott Wave International's analysts regularly consult dozens of market indicators -- some you may have heard about, others more esoteric -- all of which combine to give us a market snapshot often overlooked by the mainstream.

Having said that, EWI is not a fan of the "statistical" variety of market indicators -- this January 3 Bloomberg quote about a "stalwart" of the Stock Trader's Almanac notwithstanding:

The "January Trifecta," which is based on the so-called Santa Claus rally, the market's direction in the first five trading days of the new year and the January Barometer [or, as goes January, so goes the year]. All three indicators have solid track records of predicting the market's direction for the remainder of the year.

Here's what the January 2019 Elliott Wave Theorist said about the "January Indicator":

The January Indicator is simply the observation that since 1942 the Dow has closed up for the year 43 out of the 53 times that the Dow has risen over the first five trading days of January. This is one of those statistical indicators, such as the Presidential Cycle and the Super Bowl Indicator, that can emerge as artifacts from data series that are in fact randomly related to each other.

One would think that, if the first five trading days of January were meaningful as to investors' intentions, the converse would be true. But it isn't. Years in which January starts lower have no consistent outcome. One reason the January indicator "works" as formulated is that most years since 1942 have been up....

We don't use statistical indicators such as this. We note only that in some years... it offers investors a rationale for optimism.

So, there you have it.

On the other hand, EWI does put a lot of stock in the late Paul Macrae Montgomery's Magazine Cover Indicator. Here's how an EWI analyst summed it up: When a financial trend is so strong or in force for so long that it makes the cover of a general-interest news magazine, the trend is usually fully acted upon and therefore close to a reversal. A cover story about a particular market (or person) in a financial publication can also be effective, but a general-interest news publication such as Newsweek carries more weight as a contrary signal because it probably reflects a broader public consciousness.

Let's look at another past Theorist (July 2008) for how this indicator was applied. Here are two charts and commentary:

HomeSweet

This chart published in The Elliott Wave Financial Forecast in the summer of 2005, and we've updated it to show their comment from September 2005 and this magazine cover, "Home Sweet Home." "Housing's home stretch" was their comment, and afterwards: "A bear market in real estate has just begun," from September 2005. As everyone knows, in 2005 you could not find a bear on real estate... except here at EWI, because we try to use people's comments like that as contrary indicators....

So, what's happened since? The Homebuilding Index for the S&P 500 has gotten absolutely crushed. This was an advance warning here in 2005.

As you probably know, the housing market continued to get crushed for a few years after that July 2008 Theorist published.

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Countertrend Price Moves Can Trick You

So, to see them for what they are, prepare ahead of time.

The first step is to learn the main trend. Hence, opposite moves must be countertrend.

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