Market’s early warning system spells trouble

The bad news keeps piling up on Wall Street, as shocks ranging from North Korea’s latest nuclear saber-rattling to fears of a China-inspired global slowdown have sent the Dow Jones industrial average to its worst three-day start to a new year since 2008.

The slow start has Wall Street closely eyeing the market’s “early warning system,” a seasonal market quirk tracked by The Stock

Trader’s Almanac that helps predict how stocks will fare for the full year based on how they perform in the first five trading days.

This early warning system has a high accuracy rate when the Standard & Poor’s 500 stock index posts a positive gain five trading sessions into a new year. In fact, the past 42 up “first five days” were followed by full-year gains 83.3% of the time, with average annual gains of around 14%, according to the Almanac.

The indicator is less reliable when the S&P 500 finishes down the first five trading sessions. The past 24 times the market has finished down after five days, it posted average gains of just 0.7 and finished lower for the year 11 times, or 45.8%.

So, if the S&P 500, which is down 2.6% in the first three trading days of 2016, doesn’t get back into the black by Friday’s close, there’s basically a 50-50 chance the year will finish down, too.

But investors should not despair, as there’s still more than three weeks of trading to go in January. How the market fares in the full month is more predictive of how the full year will play out, this indicator shows.