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Why Calendar-Based Market-Timing Won’t Work

calendar We’re currently about half-way through January 2014 and the Straits Times Index (SGX: ^STI) is now at 3,141 points, some 0.8% lower than its 31 Dec 2013 close at 3,167 points. If we extrapolate the index’s current movement to the end of January, the stock market’s performance for the rest of the year does not seem particularly exciting for believers of the “January Barometer”.

The barometer is a curious investing myth in the USA which states that the performance of stocks in January would portend the general movement of shares for the rest of the year. There are even seasoned professional investors, such as Sam Stovall, chief equity strategist from S&P Capital IQ, who believe in the barometer.

But, does it work in Singapore? I dove into historical data for the STI starting from January 1993 and it turns out, investors in Singapore can do better with a coin flip than using the January barometer in predicting subsequent market returns.

There have been 11 Januarys since 1993 where there was a positive monthly return. But out of those 11 Januarys, there were three where the subsequent returns (from the end of January till the end of December) were negative.

In the 10 Januarys that gave negative monthly returns, there were actually five where the rest of the year ended up having positive returns.

Year

Monthly Return for January Subsequent Return from end of January to end of December

1993

6.3% 49.7%

1994

-3.6% -4.3%

1995

-7.0% 8.8%

1996

8.1% -9.5%

1997

-0.01% -31.0%
1998 -17.6%

10.5%

1999 2.5%

73.6%

2000 -10.1%

-13.6%

2001

3.4%

-18.5%

2002

10.1% -25.0%

2003

-3.7% 36.6%

2004

4.8% 11.8%

2005

1.5%

12.0%

2006 2.8%

23.8%

2007 4.7%

11.4%

2008 -14.4%

-40.9%

2009 -0.9%

65.9%

2010 -5.3%

16.2%

2011 -0.3%

-16.8%

2012 9.0%

9.0%

2013 3.7%

-3.5%

Source: S&P Capital IQ

As it is with the “Sell in May and Go Away” calendar-effect, the January barometer doesn’t seem to give an investor any good odds of success.

My colleague David Kuo once wrote: “I won’t be selling because some antediluvian saying tells me to do so [referring to “Sell in May and Go Away”]. As investors we should be reviewing our investments regularly. That means getting rid of investments that are not performing and investing the money into those that are, regardless of the time of the year.”

All told, basing our investment decisions on arbitrary times of the month, year, lunar-cycle, or what-have-you, is a distraction from what’s truly important – the long-term corporate performance of a company.

Shares like Jardine Strategic Holdings (SGX: J37), Jardine Matheson Holdings (SGX: J36) and Singapore Exchange (SGX: S68) have given shareholders total returns in excess of a 1,000% since the start of 2003.

Company Price on 2 Jan 2003* Price on 10 Jan 2013 % Change 2003: EPS** Last 12 months: EPS % Change 
JSH US$2.15 US$33.10 1,439% -US$0.021 US$3.012 14,630%
JMH US$4.47 US$53.61 1,098% US$0.23 US$4.62 1,895%
Singapore Exchange S$0.56 S$7.07 1,135% S$0.016 S$0.331 1,969%
*Prices on 2 Jan 2003 are adjusted for dividends, stock-splits, rights offerings, and spin-offs.**EPS = Earnings Per Share

Source: S&P Capital IQ

But, those gains weren’t achieved on the back of some calendar-based market-timing method. Those gains were achieved through patience and blockbuster-like earnings growth through the years. The next time you come across any seemingly-arbitrary market-timing ‘”advice”, bear in mind these words from American super investor Warren Buffett:

If a business does well, its stock eventually follows.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.