The SPX's first week has proven to be a decent indicator for rest-of-year returns
The
S&P 500 Index (SPX) and
Nasdaq Composite (COMP) have started 2017 on solid footing, with the former snapping the recent trend of dismal first weeks. In fact, it marks the
S&P's first positive start to a year since 2013, as Schaeffer's Senior V.P. of Research Todd Salamone noted today. What's more, the first five days of trading have proven to be a decent indicator for the rest of the year, according to Schaeffer's Senior Quantitative Analyst Rocky White, suggesting stocks -- particularly tech stocks -- may have just sounded a bullish signal.
Today is the fifth trading day of 2017, with the SPX already sporting a year-to-date lead of roughly 1.57%, tagging a record peak just last week. If today's gains hold, it will mark the best first week in four years, with 2013 resulting in an annual gain of 26.85% for the broad-market index.
As alluded to earlier, the better the SPX does in the first five sessions, the better it tends to fare through year-end. When the index was up less than 2% to start the year -- as it's done 37 times since 1929 -- it averaged a rest-of-year return of 7.49%, and was positive a healthy 62.2% of the time. A first-week gain of
more than 2% has resulted in an average return of 11.56%, with 81.8% of those years ending positive. On the other hand, a negative start to the year has resulted in
much slimmer average year-end returns of less than 1.5%, with no more than 50% of those years ending in the black.
As you might have guessed from the "Number of Returns" column in the chart above, the SPX tends to perform better than usual in the first week of the year, with 67% of these weeks positive since 1929. The index has averaged a gain of 0.57% in the first five days of the year, compared to an average anytime five-day return of 0.14%, and is slightly less volatile than usual, as you can see by the "Std. Deviation" column below.
Meanwhile, the
Nasdaq is just off a record high today, and has rallied roughly 2.9% since the start of 2017. Going back to 1972, when the COMP kicked off the year with a gain of more than 2% in the first five days, it ended the year higher 83.3% of the time! The tech-rich index has averaged a year-end return of 16.39%, to boot. However, it's worth noting that perhaps a drop of less than 2% to start the year would be more fortuitous, with the COMP ending all seven of those years in the black, with an average gain of nearly 25%.
On the other hand, blue-chip stocks could endure a weaker-than-usual 2017, if history is any guide. Going back to 1900, when the
Dow Jones Industrial Average (DJIA) has been up less than 2% in the first five days -- it currently sports a year-to-date lead of 0.8% -- it's gone on to average a return of 3.74% for the year, the smallest of all the groups. Just over 60% of those years (there are 53) ended in positive territory.
In conclusion, the first week of 2017 could signal another solid year on the books for the S&P 500 Index and Nasdaq Composite, if recent history prevails. However, traders should remember that
the first year of presidential cycles tend to be weak, and as Salamone noted earlier today, while stocks continue to look healthy, "the sentiment backdrop suggests they are more vulnerable than usual to negative headlines, so ensure that you are prepared for a setback."
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