What the ‘January Trifecta’ in the stock market is really telling us

It’s a bad sign that so many on Wall Street have gotten excited about the so-called “January Trifecta.”

I’m referring to the stock market’s strength during each of these three recent periods:

  • From Christmas through the first two trading days of January (the so-called “Santa Claus Rally” period)

  • The first 5 trading days of January, and

  • The full month of January (the “January Barometer”)

I’ve lost track of the number of emails I’ve received from analysts this week claiming that this Trifecta means the stock market will rise strongly for the rest of this year.

Read: U.S. stock market hits the ‘January Indicator Trifecta,’ but can the rally last for the rest of 2023?

The reason I consider this excitement a bad sign is that there is no statistical significance to the Trifecta. So the excitement tells us that the mood on Wall Street remains the “slope of hope” on which bear markets thrive. Perhaps this is why the stock market kicked off the month of February by plunging.

The history of the January Trifecta traces in large part to the late Yale Hirsch, author of the Stock Trader’s Almanac, who created the “Santa Claus Rally” and “January Barometer” indicators in the early 1970s. In recent years Hirsch’s son Jeffrey, the current editor of the Almanac, has combined these two indicators with a previously well-known indicator based on the market’s direction in the first five trading days of the year.

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A true real-time test of the January Trifecta’s track record would therefore be able to focus only on a few even more recent years, which comprise so small a sample that there would be virtually no chance of satisfying traditional standards of statistical significance. I therefore bent statistical protocol to focus on the Trifecta’s record back to the early 1970s, when two of the three components were created. The accompanying chart reports what I found.

As you can see, the proportion of years in which the Dow Jones Industrial Average
rose from February through December was essentially the same, regardless of whether I focused on all years, just the first of the Trifecta’s indicators, the first two, or all three. The differences plotted in the chart are not significant at the 95% confidence level that statisticians often use when assessing whether a pattern is genuine.

A contrarian interpretation

The bulls are grasping at straws by getting excited over something that is statistically meaningless. That’s very telling, according to contrarian analysts.

Consider how Wall Street would have reacted to the current January Trifecta if the prevailing mood was a Wall of Worry—the sentiment environment in which bull markets tend to thrive. In that event, we’d have been told that the Trifecta was a trap to lure the gullible back into the market just before it plunges.

Needless to say, that’s not how Wall Street in fact is reacting.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]

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