Image Source: Unsplash

The month of January closed with a 2.7% gain in the S&P 500, which was well above the historical average (1.06%) and the average over the last 10 years (1.14%).

(Click on image to enlarge)

There is an old adage that says, “as goes January, so goes the rest of the year,” although the evidence doesn’t quite back that up. However, I looked back at the times when January finished especially strong. In this case, this is defined by a January gain of 2.5% or more. Since 1958 (the first full year of the S&P 500), there were 29 such occurrences -- about 42% of the time.

(Click on image to enlarge)

What we can see is that when January has been strong, the market has often ended up closing the year above that January's closing level about 86% of the time (25 out of 29), with an average gain of 11%. Bear in mind, this only takes into account the start and end points in the timeline. There could have been significant volatility in between those periods.

(Click on image to enlarge)

Now, we march into what has historically been the second weakest month of the year, with an average return of 0.04%, with only the month of September being seasonally worse.

(Click on image to enlarge)

The month of February has only closed with a gain around 54% of the time (a coin-flip basically), with September being the only month with historically worse odds.

(Click on image to enlarge)

Additionally, I checked to see if February's returns were any different after a strong January period. It turns out that it is actually a little worse than the historical average. Average returns for February after a strong January are actually -0.20%, with the month only finishing positive about 53.5% of the time.

(Click on image to enlarge)

Let’s add in the fact that the S&P 500 hit a major measured move target in January at the 6115 mark, essentially matching the size of the 2020-2022 bull market in terms of points. This has the potential to act as resistance, at least in the short-term, and signal that the market may be overbought.

(Click on image to enlarge)

So far, the measured move resistance has held twice now (as shown by the dark red line). We hit it last Friday, and it fell on Monday’s news of a Chinese low-cost AI alternative. We then saw the S&P 500 rally back to the 6115 level on Friday, only for it to then roll over on the recent tariff news.

The key pivot points going forward will be the 6115 level above and the January low at around the 5780 level below (which was the post-election day gap up). Even though we have encouraging data that shows the potential for another good year in the markets, don’t be surprised to see some weakness along the way.

More By This Author: