What It Means for the S&P 500 to Have Broken Its Low From December

Stocks are not doomed for the rest of the year simply because January’s low was lower than December’s low.

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This assertion challenges another January-based market indicator that some investors use to predict the stock market’s direction for the full year. Earlier this month, I examined several January-related indicators, concluding that they provide little to no reliable insight into annual market performance. In response, some readers suggested I overlooked an important indicator with an impressive track record: the comparison of January’s low to December’s low.

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According to this theory, if January’s low is below December’s low, it’s a bearish signal for the rest of the year. This year, the S&P 500 closed below its lowest December level on January 10, seemingly triggering this negative signal. However, the historical data tells a different story, and there’s no reason for concern. The indicator lacks significance when tested against traditional statistical standards.

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A historical analysis dating back to World War II reveals the limitations of this indicator. During years when the S&P 500’s January low was higher than its December low, the market rose 76% of the time between February and December. In contrast, when January’s low fell below December’s low, the market still rose 71% of the time during the same period. This 71% success rate is statistically similar to the 76% rate, which undermines the argument that breaking December’s low in January is a reliable bearish signal.

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Interestingly, some on Wall Street report a much lower success rate of just 50% for years when January breaks December’s low. However, this figure stems from a flawed calculation that misrepresents the indicator’s performance. The error occurs because these calculations rely on full-calendar-year returns, starting from January.

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Since the data point in question—whether January’s low breaks December’s low—is only knowable at the end of January, the proper analysis should exclude January’s performance altogether and focus on February through December. By including January’s losses in their calculations, proponents of the indicator inadvertently double-count January’s impact, skewing the results downward.

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When calculated correctly, the indicator’s 71% success rate is far better than the 50% figure often cited, but it still falls short of being statistically significant. In other words, the observed differences between the two scenarios—whether January’s low is above or below December’s—are not substantial enough to confidently predict market direction. This lack of significance aligns with the broader reality that most Wall Street indicators perform no better than chance.

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Even in rare cases where an indicator demonstrates meaningful predictive power, its reliability tends to diminish quickly as traders exploit the signal. Once widely recognized, any statistically significant indicator becomes a target for arbitrage, neutralizing its edge over time. This pattern further underscores why most indicators, including the one in question, are unreliable tools for forecasting.

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None of this is to suggest that the stock market will necessarily end the year higher than its current level. Rather, the lack of statistical significance in this particular indicator means it offers no meaningful guidance—bullish or bearish—about the market’s prospects. Investors should approach such metrics with skepticism, recognizing their limited value in making long-term decisions.

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Ultimately, the stock market’s behavior is shaped by numerous complex and interconnected factors, most of which are not captured by simplistic indicators. While the appeal of January-based signals lies in their accessibility and seemingly straightforward logic, their actual predictive value is negligible. Investors are better served by focusing on more substantive factors, such as economic fundamentals, corporate earnings, and macroeconomic trends, to guide their decisions.

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