The S&P 500 is in danger of setting a negative trend for the whole year if it closes lower for the first full week of the New Year, Royce Tostrams, technical analyst at Tostrams Groep, told CNBC.
If the market reacts badly to the monthly nonfarm payroll data and ends the week in the red, it would predict another dire year for the index, according to the “January Effect,” Tostrams said.
Video: watch the full Royce Tostrams interview
“Historically, if the S&P goes up in the first week of the year, then the trend for the rest of the year will also be positive … If the S&P falls in the first week of January, then it will fall for the rest of the year,” he said.
“The January effect has been observed numerous times through history and since the ‘60s, (it) has been repeated in about 75 percent (of years),” he added.
In 2008, the “January Effect” neatly predicted the weakness to come as the S&P fell over 5 percent in the first week of the year, according to Tostrams.
The S&P is struggling to stay in positive territory for the week so far and faces a dismal jobs report later on Friday. Analysts expect the U.S. economy to have lost 550,000 jobs, which would underscore the extent of the economic slowdown.
However analysts are divided as to whether job losses of that magnitude would cause a selloff in stocks. Some believe that a dose of bad news would give investors a sense of progression through the inevitable.
The S&P opened at 929.17 on Monday 5th of January and closed at 909.73 on Thursday.
Tostrams’ target for the S&P is between 1,000 and 1,450 points, which are the November and October peaks of last year.
“The pattern for the S&P 500 is sideways so this is not a market for investors, this is only a market for traders,” he warned.
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