Investors see typical seasonal patterns failing with little hope for a Santa rally or January bounce

Published Wed, Dec 21 202210:35 AM ESTUpdated Wed, Dec 21 202212:04 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Stocks don't need a Santa Claus rally in order to see a positive new year, but it would help if the market can show gains in January. The seasonal ebb and flow of the market, based on historic patterns, is a science followed by many market strategists. But in 2022, many of those patterns failed. To take one glaring example, the S & P 500 is on track for a near 20% decline in 2022, even though the market gained during the seven-day Santa Claus rally period in 2021-2022, which covers the final five trading days of the prior year and the first two trading days of the new year. The usually reliable indicator historically shows the S & P 500 gains 73% of the time in the coming year when rising during those seven days. On the other hand, the so-called "January barometer," wasn't positive a year ago, when the S & P 500 dropped 5.1% for the month in 2022, but held true to the old Wall Street adage — "so goes January, so goes the year." "The first three months of the year offer pretty convincing evidence of what is likely to happen for the full year," said Sam Stovall, chief market strategist at CFRA. He said since World War II, the market was up 60% of the time in January and, when that happens, stocks on average go on to post a 16% gain for the full year. In the years when there was a negative reading for the first month of the year, the S & P 500 averaged a decline of 1.7% over that calendar year, according to CFRA data. "I think the market could be negative in January," said Stovall. He and other strategists expect the market could test its 2022 lows in the new year, as investors react to Federal Reserve rate hikes and negative earnings revisions. "We might be in for a challenge in 2023, unless the breadth of the market picks up before year end," said Stovall. Separately, a metric he watches on S & P subindices shows more have fallen below their 50-day moving averages in December, a sign of negative momentum. There are many versions of the Santa Claus rally, and some traders expect it is just a positive move in December or even in the second half of the month. But according to the Stock Trader's Almanac , the Santa rally rule says when stocks are higher in the final five trading days of December and the first two of January, the market is typically higher in the new year. According to CFRA, the S & P 500 has been positive 77% of the time during the Santa rally period, and the S & P 500 has gone on to rise an average 9.8% in the following year. When the S & P was negative, the market was up about half that amount for the year, just 4.7%. The performance of stocks in the first five days of January is also a closely followed metric. When those early days of January show a gain, the S & P was up an average of 12.9% for the full year since World War II. The first five trading days of the year were positive 67% of the time, and the market then gained 82% of the time when that occurred. All three periods — Santa Claus rally, first five days of January and the entire month of January — have been positive together 42% of the time, and in those years, the S & P 500 gained 17% in that following calendar year. When they were all negative, which happened just 10% of the time, the S & P declined an average of 3.7% for the year. When the market is up in both January and February, the S & P has gained an average 20.2% for the full year. That positive combination has only happened 37% of the time since 1945, but the S & P gained 97% of the time for the entire year when it did. When those months were negative, the S & P declined an average 4.3% for the year. The S & P was down 3.1% in February of 2022. In the year 2021, the S & P 500 gained 27%, but there are two distinct patterns following that type of gain. "The market typically experiences a decline early in the year following a 20% plus gain, and the average digestion for the prior year gain equaled 11%," Stovall said. But, historically, whenever the decline started in the first or second quarter, the S & P 500 was higher by the end of the year 100% of the time. Not in 2022. "History threw us a curve ball. Whenever the decline started in the new year, we always got back to break even," he said. "However, this time the peak was Jan. 3, and we ended up falling into a bear market from which we never recovered."