Many try to predict what the market will do based on something that may have happened some time in the past. Market prediction is one of the most difficult things to do because every year and situation is different. However, it is interesting to take a look at these patterns

Here we look at the famed “first five days of January indicator”. The story goes like this, if the market is up in the first five trading days of a new year, it results in positive returns for the entire year. Over the last 20 years, there have been 12 occasions where the Sensex has closed in the positive in the first five days of the calendar year. Out of these 12 occasions, the year itself was up 67% of the time. However, the other times when the first five days were negative, the year closed positive 63% of the time. Thus there is no significant pattern to say how the year would perform seeing the performance of the first five days of the year.

In the US, the pattern of trading in the opening week of the year is based on the assumption that money from pension funds, etc, is ready to flood the market and raise prices. For the Dow index, of the 38 most recent years that the first five days resulted in a gain, the year, itself, was up 86.8% of the time. The pattern is a bit less successful when the first five days are down.

Art Cashin, UBS head of trading at the New York Stock Exchange, in his piece on “Roller Coaster Commuting And Early 2012 Trading Patterns” takes a look at these patterns in the US. He mentions Jim Brown, a sharp-eyed investor who noted in this Premier Investor Newsletter, “Of the last 15 years there have been an almost even number of up days and down days (8-7) on the first trading day of the year. It is hard to see a trend there. If we extend it to cover the first week it remains a dead heat. However, if we look at the end of January compared to the first day of the year, the Dow is down 10 times and up only five. Looking even closer there was a significant sell-off in January 12 out of 15 years. In some cases they lasted only a week or so but they were normally significant program-driven declines. Once the year-end money was invested, a sharp sell-off appeared to capture profits. I speculate the hedge funds were invested ahead of the retirement fund pop for mutual funds and the hedge funds took profits when it was over. The pattern is very well defined.”

But is this case similar for India? Out of the last 20 years the Sensex has been down for the month of January, 11 times, so there isn’t much of similarity in the pattern with that of the US. However, we noticed some other patterns, during the first five days of the year when the Sensex closed negative, the month closed negative on 75% of the time. Out of the 12 times the Sensex has closed positive in the first five of days trade, the first month has closed positive on just 58% of the time.

Another pattern that we noticed is that when the Sensex closed negative for a year, the index was up 67% of the time in the first five days of the following year. When the Sensex has been up for the year, it has been able to post a gain in the first five days of the following year on just 57% of the time. In 2011 the Sensex closed negative, if it follows a pattern of the previous years, chances are we may see the index up by the end of this week from the start of the year.