Simple ‘first five days’ stock market indicator bodes well for 2021

Published Mon, Jan 11 202111:14 AM ESTUpdated Mon, Jan 11 202112:23 PM EST

(This story is for CNBC Pro subscribers only.) The stock market jumped to a record high during the first five trading days of 2021, and based on a classic Wall Street indicator, the early strength is a good omen for the full year. The so-called "first five days" rule believes that if stocks perform well in the initial five sessions in a given year, the market is often up at the year-end, according to Stock Trader's Almanac, which studied the market phenomenon going back to 1950. A simple rule like this is not something to base investment decisions on, but it should give investors a bit of comfort given its solid track record. When stocks finish the first five days higher, the S & P 500 has been positive 82% of the time at year-end with an average gain of 13.6%, according to Stock Trader's Almanac and CNBC calculations. The S & P 500 climbed 1.8% during the first five trading days of 2021 and closed Friday at a record high. The strong performance came amid a wild week on the political front where violence rocked the Capitol and lawmakers moved forward to impeach President Donald Trump. Investors focused on the prospect for additional Covid-19 stimulus after a Democratic sweep of Congress. The beginning of a year is an important time for investors to put money to work and can indicate the level of confidence and reveal their bias for the year. However, the "first five days" rule's predictive ability could just be coincidental given that stocks rise most years. Plus, a lot can happen going forward as Wall Street is grappling with an unprecedented pandemic and political turmoil. The market pulled back from record highs on Monday as many grew worried that stocks are running too hot and valuations are stretched against its longer-term trend. "In part due to what we see as potentially extreme complacency amongst investors, we think this market is susceptible to a potentially scary 'air pocket' on any sort of materially negative surprise," Tom Essaye, founder of Sevens Report, said in a note on Monday. The "first five days" rule was prophetic last year. The S & P 500 finished the first five days with a 0.7% return, and the index ended up gaining 16.3% for the volatile year. There are two other seasonal gauges in January — "the Santa Claus rally" and " the January barometer." The most bullish scenario is when the trifecta of indicators all send a positive signal, according to Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac. For now, it's been two for two. The "Santa Claus rally" calls for strong performance during the final five trading days of the year and the first two trading days of the new year. The S & P 500 gained 1.1% during this period. The January barometer says a higher January should mean a higher year, which is the thinking behind the Street's saying: "So goes January, so goes the year." Hirsch said there have been 31 Trifecta occurrences since 1950, and the S & P 500 advanced 87.1% of the time during the subsequent eleven months and 90.3% of the time for the full year. — CNBC's Nate Rattner contributed to this article.

A woman walks past the Charging Bull in New York.

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(This story is for CNBC Pro subscribers only.)

The stock market jumped to a record high during the first five trading days of 2021, and based on a classic Wall Street indicator, the early strength is a good omen for the full year.

The so-called "first five days" rule believes that if stocks perform well in the initial five sessions in a given year, the market is often up at the year-end, according to Stock Trader's Almanac, which studied the market phenomenon going back to 1950.

A simple rule like this is not something to base investment decisions on, but it should give investors a bit of comfort given its solid track record.