In past years, there have been times when the stock market has mimicked a roller coaster ride with regular rises and dips. Most investors don’t like that kind of ride though, with the exception of day traders, who invite volatility.

Over the past eight years, the roller coaster has been mainly steaming up a tall incline in the ride without too many dips along the way. Twenty-seventeen saw record increases in stocks with five separate 1,000-point milestones during the year.

January 2018 was the best January in 21 years for the market. There was only some volatility seen at the end of the month. The month saw the S&P rise by 5.62 percent.

One trend, that is based on historic evidence, is known as the “January Barometer.” From 1950 to 2017, a good January has been a predictor for the market 87 percent of the time. Since 1980, the January Barometer has predicted where the S&P would end the year 68 percent of the time.

This has resulted in a Wall Street axiom that goes; “As goes January, so goes the year.”

While a trend that is backed by a high percentage of past years’ results is convincing, it was the end of January and the beginning of February that threw a fly in the ointment. Also, since the year 2000, the indicator has been wrong eight times. Since that year, the market has either finished higher after getting off to a rocky start or ended the year lower.

End of the Month Pulls Back

The CBOE Volatility index (VIX Index), the so-called “fear index,” which increased to 14.3 by January 30, had already risen by more than 20 percent the day before. Keep in mind that during the market disruption of 2008, the index hit 80.

Fears of inflation caused two of the last three days of the month to pull back. On January 29 and 30, the S&P dropped .7 percent and 1 percent, the first two consecutive days with drops over .5 percent in 310 trading days.

Valuations, that have exceeded many investor’s comfort zones, have added volatility to the market that hasn’t been seen lately, along with rising bond yields. For the past couple of years though, that volatility has been mostly suppressed amid geopolitical events and domestic political events that might have unraveled it in the past.

Part of the reason for this is that actions by the Fed have been minimal and some geopolitical events like Brexit have involved kicking the can down the road. Global fundamentals are also stronger with most developed counties enjoying full employment.

While January ended partially on a rocky note, February continued the trend with one of the worst weeks for the market in two years. The week ended with a drop of more than 1,000 points. If January was a harbinger for the year, it didn’t tell February.
With that in mind, 2018 may end up as a roller coaster ride, and the end of the year may be at a peak, or it may be in one of the dips. Investors can only hope that at the end of the ride, as goes January, so goes the year.

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