If you're looking for a forecaster more accurate than the weatherman, you might want to consider the January effect.

Since 1950, the Standard & Poor 500's performance in January has been a pretty accurate indicator of how the stock market would perform for the entire year, according to the 2010 Stock Trader's Almanac.

Over that period, there were only six years when the S&P 500's January results went in one direction and the index moved significantly in the opposite direction for the full year, a forecasting accuracy of 90 percent. The almanac says if you include the 10 years when the index advanced or declined less than 5 percent for the full year, the accuracy drops to 73 percent, still a score many meteorologists would envy.

The January effect diverged from the norm last year, when the S&P 500 declined nearly 9 percent in January, but finished the year up 26.5 percent, including dividends.

Geoffrey Gerber of Twin Capital Management in McMurray says that in 24 of the last 35 years, the S&P 500 moved in the same direction in January as it did from February through December of the same year. Over that period, there were 22 positive Januaries; in only three of those 22 years did the index decline from February through December, Mr. Gerber says.

Market watchers offer a number of possible explanations for the phenomenon: executives investing year-end bonuses; workers who resolve to save more for retirement in the new year; investors coming back to the market after selling losing investments in December; pension funds and other institutional investors rebalancing their portfolios.

John Frankola of Pittsburgh-based Vista Investment Management says the January effect is more pronounced with stocks of smaller companies. He says the indicator has been reliable enough to prompt some investors to place their bets early.

"December has been a strong month because people anticipated the January effect and started buying early," he said.

Last month, the S&P 500 advanced 1.8 percent, the equivalent of a 25.3 percent annualized return (including dividends). Bloomberg data shows that December was an even stronger month in 2004, 2003 and 1999.

Greg Melvin, chief investment officer of C.S. McKee, Downtown, thinks the January phenomenon reflects pension plans rebalancing their portfolios as well as their willingness to start the year by taking a little more risk -- after showing a more conservative portfolio to investors in their year-end reports.

"People put the risk trade back on in January," he said. "Junk [bonds] work the best, then small cap stocks."

University of Pittsburgh finance professor Jay Sukits says the January effect was more noticeable 10 or 15 years ago when individual investors accounted for more than 50 percent of small cap stock trading. Their financial advisers would recommend that the investors "harvest" losses in December by selling losing stocks to offset the capital gains from the winners in their portfolio and repurchasing the stocks in January.

Mr. Sukits says the impact of tax-loss selling is less pronounced now that large investors account for more of the small cap market. For him, the January phenomenon is more a barometer of how investors view the economy.

"The January effect now is much more about fundamentals than it was 10 or 15 years ago," he said.

Another indicator that draws attention relates to the presidential election cycle. Since 1928, the S&P 500 has produced average gains of 7.9 percent in the first year of a president's term, 8.3 percent in the second year, 18.4 percent in the third year and 9.2 percent in the fourth year, Mr. Frankola says.

The theory is that Wall Street does best in the third year of a president's term, as the White House and Congress enact tax cuts and other measures to stimulate the economy and make voters more inclined to re-elect them. The first two years of a president's term generally offer the poorest returns because politicians have to raise taxes or cut spending to cover the costs of the promises made in the third and fourth year of the cycle.

Last year, S&P 500's performance was more than three times better than the first-year average (and, according to Mr. Frankola's research, strikingly similar to results in 1961, President Kennedy's first year in the White House).

"I think the whole global financial meltdown threw the cycle off," he said.

However, whether you link the market's performance to the January effect, the election cycle, the Super Bowl or some other phenomena, keep in mind that over the long haul, the market reflects the economy and perceptions of where it's headed. Despite the improving economic outlook, there is enough uncertainty to throw the market off track once this January is in the books.

"There are so many negative things overhanging this market that the market is very fragile," Mr. Sukits cautioned.

Finally, consider that since 1950, there have been 10 years when the market produced gains despite a down January. When you add that to the years when both periods produced positive returns, you'll realize the market had positive years 68 percent of the time no matter what happened in January.

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