Is STI a 'lost cause' in 2009?
Past performance is no guarantee of future returns


By Zhen Ming


ACCORDING to conventional wisdom accepted by many stock market traders and investors in Singapore and elsewhere, 'as goes January, so goes the year'.

How reliable is this conventional wisdom - that January is a reliable weather vane for the performance of Singapore's Straits Times Index (STI) for the rest of the year?

Is this adage merely another piece of financial urban legend?

Although this January saying has been trotted out at the start of virtually every year since it cropped up on Wall Street in the 1970s, it has a special resonance for Singaporeans in this current Ox Year (given the STI's steep drop last year).

January rally effect

Singaporeans can still recall that last year's 49.1 per cent plunge was presaged by a 13.9 per cent drop in the STI last January.

There are two components to this January proverb:

(1) The January rally effect, which is supposedly evidenced by a general increase in stock prices during the month of January; and

(2) The January barometer effect, whereby whatever happens in January becomes a harbinger of what's in store for the stock market for the rest of the year.

According to the January rally effect, a stock market rally in January can generally be attributed to an increase in buying, which follows the drop in price that typically happens in December when investors (especially those in the US), seeking to create tax losses to offset capital gains, prompt a sell-off.

This historical trend, however, has been less pronounced in recent years because stock markets worldwide have already adjusted for it.

For the STI since 1988, the January rally effect is true for 14 out of the 22 years observed (that is, about two-thirds of the time).

The January barometer effect seems even more reliable.

Academics and market specialists say they can now confirm the existence of the effect on Wall Street. (But they are still stumped as to why it exists.)

Abnormal

In 60 of the last 80 years, the performance of the US' Standard and Poor's 500 index in January has accurately predicted whether stocks would end higher or lower for the full year, according to index analyst Howard Silverblatt.

'Any statistician would tell you it's abnormal,' said Mr Silverblatt. 'I would not attempt to justify it. Each year is separate and different.'

This statistical anomaly also shows up for the Singapore stock market.

For the STI since 1988, the January barometer effect is, on the surface, true only for 13 out of the 21 years observed.

However, for six of the eight years when the effect supposedly failed, there were extenuating reasons why it did not work when it was supposed to.

So, with January just behind us, and with the STI down 4.5 per cent thus far this year, is the rest of the 2009 destined to be a 'lost cause' for our local bourse?

Here's a clue

For a clue, let's take a cue from the US: Wall Street started 2009 with a big rally on 2 Jan, which sent the Dow Jones industrials up more than 250 points to their first close above 9,000 in two months.

But Wall Street subsequently ended the last trading day of January down 11.4 per cent - equivalent to an annualised loss of around 137 per cent!

So, there's my answer for you.

On a separate but related note, it turns out that it is often 'better to be late than early' to a new bull - this, according to a Merrill Lynch analysis of US stock performance in the six months before and after 10 market troughs over the last 50 years.

The study found that, on average, investors posted better returns if they invested in stocks six months after the bottom was in as opposed to six months before.

'Patience is a virtue,' says Mr Richard Bernstein, Merrill's chief investment strategist.

In the end, any talk of market patterns should be accompanied by this familiar warning: Past performance is no guarantee of future returns.


Source: The New Paper, Sun 01 Feb 2009