How true is the January Theory?

I have heard numerous readers who claim to have read documents that indicated a positive January for the equity market may likely result in continued appreciation for the balance of the year.

Jeffrey Warantz, quantitative strategists for Smith Barney, noted in a February 2005 report, "A Rough January is not the End of the World," that this belief has led some to make the converse assumption: "that a negative January leads to additional losses."

Although prior performance is not indicative of future returns, he examines the burning issue surrounding performance for the remainder of the year when the market is down in January. Warantz stresses that the following data is not to be predictive of S&P 500 performance for the balance of 2005.

According to the Smith Barney Research Department, the S&P 500 achieved positive returns 70 times in January, and lost ground only 35 times from 1900 to 2004. Following the 70 January gains that have been achieved since 1900, the S&P 500 posted positive returns over the subsequent 11 months 58 times, and lost ground only 12 times.

The results following the 35 January losses have not been as distinctly biased toward the positive side. Among this group of 35 periods, the S&P 500 achieved positive returns in the remaining 11 months 17 times, and negative returns 18 times.

Mr. Warantz highlights a few outstanding data points worth noting:

• The best January performance (1900-2004) was 13.4 percent in 1987. The S&P 500 proceeded to fall 7.2 percent in the next 11 months.

• The worst January performance (1900-2004) was Ð7.4 percent in 1970. The S&P 500 proceeded to gain 12.2 percent in the next 11 months.

• The best February-December performance was 53.0 percent in 1935. This came about after a negative January.

• The worst February-December performance was Ð46.7 percent in 1931. This came about after a January gain.

• Prior to last January, the most recent January loss occurred in 2003. This loss was followed by a gain of 32.1 percent in the next 11 months.

In summary, it's true that the market has a tendency to fare better after a January gain. With a January 2005 S&P 500 loss of Ð2.44 percent, we don't have that luxury this year. However, I believe the year is still quite early and we should not make hasty assumptions for a tough ride in 2005.

Smith Barney's year-end S&P 500 prediction of 1300 may prove to be a bit conservative. We see potential strengths in balance sheets, valuations and sentiment aiding in a potentially strengthening year.

However, we also see volatile energy prices, protectionist policies, terrorism and geopolitics as being potential spoilers.

For more information, e-mail william.a.creekbaum@smithbarney.com or call 689-8700.

Smith Barney does not provide tax and/or legal advice. Please consult your tax and/or legal advisors for such advice.

n William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial-services firm serving Northern Nevada.