Do the first five days predict the full year?

The January Effect refers to the tendency of small cap stocks to out-perform large-cap stocks in the month of January. However, the term January Effect is used rather loosely to also refer to stocks generally being strong in the first month of the year, and also to how the direction of the market in January forecasts the market direction of the whole year (this latter effect is also termed the January Barometer). [A previous article explained the multiple January Effects in greater detail.]

Here, we are going to look at a variant of the January Barometer to see if the first five days of the year predict the return for the whole year.

First, we will call this variant of the January Barometer: January Barometer (5D).

The bald figures don’t look encouraging: in the 46 years since 1970, the January Barometer (5D) applied to the FTSE All-Share Index has been right in 26 years (57%). In other words in just over half the years since 1970 the first five days of the year have accurately forecast the full year.

But let’s look at this in more detail and see if we can tease anything out of the figures

The following is a scatter chart that plots the return on the FTSE All-Share Index for the first five days of a year against the return for the full year, for the period 1970-2015.

FTSE All-Share Index first 5-days v full year return [1970-2015]

There is a positive correlation here (given by the positive sloping trend line), however the measure of correlation (R2) is very low.

Summary: the chart shows there is a very low level of correlation between first five-day returns and returns for the full year but it is far from being significant.

However, strictly, the January Barometer only says the direction (i.e. positive or negative returns) can be forecast, not the size of returns. In which case the following chart may be more useful. This plots a binary value for each year:

  • 1: if the sign on the full year return was the same as the sign for the return for the first five-days (i.e. either both positive returns or negative returns)
  • -1: if the sign on the full year return was different to the sign for the return for the first five-days

FTSE All-Share Index first 5-days predicts full year [1970-2015]

In this chart we can see the roughly even split between years when the January Barometer (5D) works and those years when it doesn’t. However, the distribution of years when it works is interesting, as there does appear to be a certain clustering of years when the effect works and when it doesn’t.

For example, in the last 20 years the January Barometer (5D) has been accurate 14 times (a hit rate of 70%). And since 2004 there is this rather odd pattern of not working every fourth year.

US presidential elections

US presidential elections also have a four-year cycle. On the chart presidential years are marked with orange bars.

It can be seen that since 2004 the January Barometer (5D) has worked every year except in years before presidential elections.

And, over the longer term, since 1970 the January Barometer (5D) has only failed in three presidential elections (a success rate of 73%).

The outlook for 2016

Generally, the January Barometer (5D) has a low success rate. However, the effect has been more significant in recent years; plus it has a higher significance in US presidential election years (which 2016 is). In 2016 the market was down in the first five days of the year, and so the January Barometer (5D) would forecast a down year with a 73% probability.

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Worst start to the year ever for the FTSE 100

The following chart plots the returns for the FTSE 100 Index over the first five-day trading period of the year.

FTSE 100 Index over first 5 days of year [1985-2016]

As can be seen, the -5.3% return over the first five days of 2016 has been the worst start ever to the year for the FTSE 100 Index since it was formed in 1984.

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So, was there a Santa Rally in 2015?

A previous article looked at whether the Santa Rally exists in the UK stock market.

To recap, below is a chart from that article.

Santa Rally [2015] 05

This chart plots the cumulative average daily returns for the FTSE 100 Index for the month of December for the period 1984-2014.

The conclusion of the article was that a Santa Rally can be observed most years, and that the rally usually starts on the 10th trading day of December.

So, what happened in 2015?

The following chart plots the performance of the FTSE 100 Index in December 2015. (NB. The X-axis shows the trading - not calendar - days of December.)

FTSE 100 December 2014 and 2015

As can be seen, the Index fell fairly steadily for the first ten days of the month; a decline of 7.6% was seen over these ten days. On the 11th day the market rallied, and climbed 7.5% over the following nine days; before weakening slightly on the final two trading days of the year.

The 6.3% rally from the tenth trading day to the final day of the year can be considered the Santa Rally for 2015.

For comparison, the Santa Rally for 2014 is also shown. In this case, the Santa Rally started a day later (on the 11th trading day) of December. In 2014 the Santa Rally returned 6.3%.

So, December can be split into two periods: the “Where’s Santa?” period of the first ten trading days, when people ask if Santa is coming to the market that year, and then the period after the tenth trading day when a Santa Rally is often seen.

Other articles on the Santa Rally.

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First trading day of January

Since 1984, the FTSE 100 Index has risen on average 0.38% on the first trading day (FTD) of January. The index has had a positive return on this day in 58% of years since 1984.

Since 2000, the performance has been much stronger on the January FTD, with an average return of 0.67% on the day, and with positive returns seen in 69% of years.

The following chart shows the returns for every January FTD since 1984.

FTSE 100 first trading day of January (1984-2015)

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Market returns around Christmas and New Year (update)

This updates the previous analysis of the historical behaviour of the FTSE 100 Index since 1984 for the nine days around Christmas and New Year. The days studied were:

  • Days 1-3: the three trading days leading up to Christmas.
  • Days 4-6: the three trading days between Christmas and New Year.
  • Days 7-9: the first three trading days of the year.

The following chart shows the average returns for these nine days around Christmas and New Year.

FTSE 100 average daily returns around Christmas and New Year [1984-2015]


  1. The average daily change of the FTSE100 index from 1984 for all days is 0.03%, so it can be seen that all nine days around Christmas and New Year are stronger than the average daily returns for the rest of the year.
  2. Generally, the market strength increases to the fourth day (the trading day immediately after Christmas) – this is the strongest day of the whole period, when the markets increases 83% of years since 1984 with an average return on this day of 0.47%. Although it should be noted that the standard deviation is the second highest on this day, meaning that the volatility of returns is greatest (the index actually fell 3% on this day in 1987 and 2002).
  3. The weakest day in the period is the third day of the New Year.
  4. The new year generally starts strongly on the first day, with performance trailing off the following two days.

The following chart shows the proportion of returns that are positive for each of the nine days.

FTSE 100 positive daily returns around Christmas and New Year [1984-2015]

The profile is similar to that for the average returns: the market is increasingly strong to the first day after Christmas, and then drops off after that.

To check the persistency of these results, the following chart compares the average daily returns for each day for the period 1984-2015 (i.e. as above) with the shorter period 2000-2015.

FTSE 100 average daily returns around Christmas and New Year

Broadly, the behaviour in the last 15 years has been similar to that for the longer period since 1984. The one obvious difference has been the extraordinarily strong average returns on the first trading day of the year seen since 2000.


Extract taken from the newly published UK Stock Market Almanac 2016.

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Market returns in odd and even weeks

This is a strange one. 

The following chart shows the value of two portfolios:

  • Odd Week Portfolio: this portfolio only invests in the FTSE 100 in odd-numbered weeks, and is in cash for the even-numbered weeks.
  • Even Week Portfolio: this portfolio only invests in the FTSE 100 in even-numbered weeks, and is in cash for the odd-numbered weeks.

The portfolios started investing at the beginning of 2010 with values of 100.

The weeks are numbered according to the ISO 8601 numbering system, whereby the week containing the first Thursday of the year is designated the first week of the year (this is also called the European week numbering system).

Odd v Even Week FTSE 100 Portfolios [2010-2015]

The divergence  in performance in the two portfolios is quite striking. By the end of November 2015 the Odd Week Portfolio would have had a value of 155, and the Even Week Portfolio a value of 74. And, as can be seen, the divergence has increased significantly in the last few months (since August 2015).

It may not be possible to exploit this phenomenon due to trading costs, but it is certainly rather bizarre.

Has this been a long-term phenomenon?

Odd v Even by decade

The following chart shows the FTSE 100 average returns for odd and even weeks for the past few decades. For example, from 1984-1989 the average return in odd weeks was 0.19% and for even weeks 0.41%,

Average FTSE 100 returns in odd and even weeks by decadeAs can seen, there has been no consistent relationship between odd and even week returns. In the decade 2000-2009, even weeks were on average stronger than odd weeks, whereas this decade the relationship has reversed – and, as mentioned above, for the moment the divergence is increasing.

While there is no obvious (or, for the moment, non-obvious) explanation for this weekly phenomenon, such weekly effects have been seen elsewhere – for example, the FOMC Cycle.

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FTSE 100 ratio of up/down days

Is there necessarily a close correlation between the ratio of up/down days in a year and the overall annual return of the FTSE 100 Index?

The following chart plots the ratio of up/down days of the FTSE 100 Index in each year and its annual returns since 1984.

For example, in 1985 (the second set of bars in the chart) there were 253 trading days, of those the Index was up on 136 days (53.7% of total trading days). This percentage figure is normalised by deducting 50% and plotted as 3.7% on the chart. In 1985 the Index increased 15% which is shown in the orange bar to the right.

The final year in the chart, 2015, has been highlighted with a grey box (partly to indicate that there are still a few trading days left in the year at the time of writing).

Ratio of up-down days and annual returns of FTSE 100 Index a

A quick glance indeed shows that positive return years are usually accompanied  by a positive ratio of up/down days. In other words, when the index has risen on more days than it has fallen in a year the index tends to be up overall in the year, and vice versa.

The largest annual return for the FTSE 100 Index (1989) was accompanied by the largest positive up/down ratio (9.3%); while the lowest annual return for the FTSE 100 Index (2008) was accompanied by the lowest up/down ratio (-6.5%). (NB. the Y-axis scale has been truncated in the chart to aid legibility; the annual returns  in these two extreme years were: 1989: +35% and 2008: -31%.)

So far, so unsurprising, but there are some interesting features to note here:

  • In the final run up to the dot-com crash (1995-1999), one can see that while the annual returns were, generally, increasing each year, the up-/down ratio was in fact decreasing. This divergence might have been an early indicator of trouble.
  • There is a definite bias for the up/down ratio to be positive (i.e. for the market to be up on more days than it falls), and when the ratio is negative it is quite small (in only two years has the ratio been less than -2%: 2002, 2008).
  • The greatest divergence in any year was in 1991 when the up/down ratio was marginally negative (the Index fell on 127 of the 253 trading days), and yet the Index ended the year up 16%. Oddly, the previous year, 1990, the up/down ratio had been identical, but the Index ended the year down 12%.
  • The up/down ratio and annual returns for the FTSE 100 have only diverged (i.e. had opposite signs) in five years: a run of three years 1991-1993, then 2014 and, so far, 2015.
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Weekly market returns and volatility

Previously we’ve looked at the daily volatility of the FTSE 100 Index (here and here), in this article we will look at the average weekly returns and volatility of the Index.

Since 1984, when the FTSE 100 Index was introduced, the mean weekly return of the index has been 0.13%. In other words, when the index is at the 6000 level, the average change in the index in a week has been 8.1 points. However, this single figure masks how the mean return of the index has changed by decade – this is shown in the following chart.

Weekly mean returns of the FTSE 100 Index by decade

In the 1980s the mean weekly return was 0.29%, which then fell to 0.22% the following decade (which marked the end of the 20-year asset boom). In the 2000s, the mean weekly return fell to a negative -0.01, and so far this current decade the mean has been 0.08%.

Although the current decade’s mean weekly return has been 0.08%, the standard deviation is 2.1 (standard deviation is a common way of measuring volatility). This means that with the index at the 6000 level, for 32% of weeks the weekly change has been greater than -122pts or +131pts.

How has this weekly volatility changed over the years?

The following chart plots the standard deviation of weekly returns of the FTSE 100 Index on a 10-week rolling basis for the period 1984-2015. (A rolling 10-week calculation is used to smooth out the chart a bit.)

Standard deviation of rolling 10-week returns of the FTSE 100 Index [1984-2015]

As can be seen, there have been some obvious spikes in volatility – notably during the 1987 crash and credit crunch in 2008. But overall the general level of weekly volatility of the index has not changed significantly in the last three decades.

In fact the average standard deviation since 1984 has been 2.1 – so the current level of weekly volatility is pretty much exactly at the mean level for the past 30 years. And, at the risk of getting too iterative, the standard deviation of the mean of the standard deviations of the rolling 10-week returns of the index is moderately low at 1.1; meaning that for 68% of all 10-week rolling periods the volatility is between 1.0 and 3.9.

Extract taken from the The UK Stock Market Almanac.

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FTSE 100 and FTSE 250 Quarterly Review – December 2015

After the close on 2 December 2015 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 18 December 2015 and take effect from the start of trading on Monday, 21 December 2015.

FTSE 100

Joining: DCC, Provident Financial, Worldpay Group

Leaving: G4S, Meggitt, Morrison (Wm) Supermarkets

FTSE 250

Joining: Assura, Hastings Group Holdings, Ibstock, Renewables Infrastructure Group

Leaving: Foxtons Group, Hunting, Kaz Minerals, Petra Diamonds, Premier Oil

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Does the Santa Rally exist?

The Santa Rally holds that the market is strong at the end of the year (around Christmas). Is this true?

The market is strong in December

The following chart shows the average returns of the FTSE 100 Index for each of the 12 months for the period 1980-2014.

Santa Rally [2015] 01

Over this period the average return of the FTSE 100 Index in December has been 2.0% (the second strongest average month return after April).

OK, so the average return in December is high, but is this attributable to just a few strong years?

To answer this, the following chart plots the proportion of December month returns that were positive over the same period (1980-2015).

Santa Rally [2015] 02

By this measure, December  is the strongest month in the year for the FTSE 100. In the 35 years since 1980, the Index has risen in 28 years (80%).

The market strength in December can be seen in more detail in the following chart, which plots the actual return of of the FTSE 100 for each December since 1980.

Santa Rally [2015] 03

The Index has only fallen significantly in December in four years since 1980. Until last year (2014), the Index had been on an 11-year winning streak.

When does the Santa Rally start?

So, December is strong for the FTSE 100. But is it possible to determine more precisely when the Santa Rally starts?

The following chart plots the cumulative average daily return of the Index throughout the year (more information about this chart).

Santa Rally [2015] 04

On average the UK market is strong from the start of November (this is a feature of the Sell in May effect). But we can also see an acceleration of the market at the very end of the year. To analyse this further the following chart plots the cumulative average daily return of the Index for December (i.e. the same chart as the above, but zoomed in on December).

Santa Rally [2015] 05

From this we can see that, on average, the market is flat for the first 10 trading days of December, after which it rises strongly. So, we can say that the Santa Rally starts on the 10th trading day of December.

How has this played out in recent years?

The following chart plots the FTSE 100 Index for the last two months of each year for the ten years since 2005. (The index values have been re-based to all start at 100.) The shaded area to the right indicates the final two weeks of the year.

Santa Rally [2015] 06

Yes, it’s something of a mess. So perhaps we can’t draw any strong conclusions. However, one can observe a slight tendency in most years for the market to rise in the final fortnight.

What is the cause of the Santa Rally?

Short answer: we don’t know?

There is no definitive explanation for this effect. Although various reasons have been proposed, including: fund managers window dressing their portfolios, positive sentiment in the market caused by the festive season which is accentuated by low trading volumes, anticipation of the January Effect, and tax reasons (NB. “tax reasons” are often cited in the absence of any definitive explanation).


  1. The UK stock market does tend to be strong in December (although it wasn’t in 2014).
  2. Stocks accelerate upwards from the tenth trading of December (which in 2015 will be 14th December). It is this last hurrah of the market – in the final fortnight – that can be called the Santa Rally.
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