Picture: THINKSTOCK
Picture: THINKSTOCK

THE sell-off in emerging markets sent a chill around the globe last week, making January the worst month on Wall Street since May 2012. European stocks had their worst January since 2010. The Nikkei sank to its lowest levels since November. MSCI’s all-world index had its biggest monthly drop in almost two years.

Suddenly, the markets have taken centre stage and everyone’s trying to infer their message.

Jeff Miller in A Dash of Insight says it will most likely turn out to be one of the following: proof that the entire 2013 rally was "built on sand" and the Fed’s folly will finally be exposed; something that resembles some past crisis in Asia or elsewhere with very much the same consequences; a long overdue, but "healthy" correction; or a meaningless blip, especially in the context of prior gains.

Backers can be found for each of these. The big lesson though, is how many pundits are once again willing to sweep aside what has been happening over months to seize on the "market message" of a few days to validate their preferred theory.

So here’s yet another reminder that you have a better chance of correctly predicting the market with a coin toss than by listening to experts: this time from CXO Advisory Group, who after tracking 68 experts and 6,582 market forecasts, concluded that predictions offered by experts have less than 50% accuracy.

"It’s hard to imagine that the average market expert isn’t able to at least match the track record of a coin flip," says proprietor Steve LeCompte, "but it’s true. From 2005 through 2012, bulls and bears employing technical, fundamental and sentiment indicators have only achieved 47.4% accuracy".

He sees no reason to continue the study as "the point about inaccurate market forecasts has been shown again, and again".

But if we cannot rely on forecasts, can we at least rely on concepts such as the January Barometer for guidance? As the Stock Trader’s Almanac explains: "Statistically … in the 75-year history examined (to January 2013), there were only 22 full-year declines. So, yes, the S&P 500 has posted annual gains 70.7% of the time since 1938 … (furthermore) when January was positive, the full year was also positive 89.4% of the time and when January was down the year was down 60.7% of the time.

"Also, every down January on the S&P 500 since 1938, without exception, has preceded a new or extended bear market, a 10% correction, or a flat year."

Another interesting titbit is that the volatility index (as measured by the VIX) was up 26% in January. Since 1986, when the VIX was launched, there has only been three previous occasions when the index gained over 15% in January.

In two of those instances, the S&P ended the year down more than 5%. The third instance was in 1987, when the market crashed in October (although it did end higher that year).

That might provide some pointers for US markets, but where does it leave us? The JSE all share index (Alsi) opened in January at 46,410 and closed last Friday at 45,132, a drop of 2.75%. But a January decline isn’t unusual on the JSE. Based on FT Chart data, in the last few years alone the Alsi closed lower in January 2008, 2009, 2010 and 2011, and ended the year higher in 2009 and 2010 and pretty much flat in 2011. If that is typical, January’s performance does not provide much guidance for the JSE.

On the other hand the Alsi’s rise from 21,348 at the start of 2009 to 46,256 at the end of last year gives credence to the notion that January’s decline is nothing more than a "meaningless blip in the context of prior gains".

As for volatility, the Alsi opened last year at 42,016, fell nearly 10% to 38,075 by mid-June, bounced back to 46,193 (up 21%) by November, and fell again to 43 185 by mid-December before hitting a high of 47,045 last month. Anyone that sold in between would have been sorely disappointed.

Unfortunately, past performance is not a guide to future performance; the JSE’s recent performance and ability to bounce back could just as easily come to an abrupt end as carry on.

But, as the FT pointed out last week, stocks in the US, Europe and Japan have not posted simultaneous declines for January since 2010 when the eurozone debt crisis was at its height, prompting many to believe that the inauspicious start does not bode well for the year.

According to Merrill Lynch Global Research data, investors worldwide pulled $6.4bn from emerging market stock funds in the week ended January 29, marking their biggest outflows since August 2011. "It’s a classic flight to quality," says the firm, "with US central bank tapering and a slowing Chinese economy weighing heavily on sentiment."