What the First Week of the Year Means for Stocks in 2018

U.S. stocks have kicked off 2018 with a bang, with the major market indexes assailing record heights out of the gate. The Dow Jones Industrial Average (DJI) just topped 25,000 for the first time ever, and the Nasdaq Composite (IXIC) is trading above the 7,000 level. The S&P 500 Index (SPX) is also trading at all-time highs, and is pacing for its best week in over a year. While this puts stocks on track for a solid January -- which has bullish implications of its own, historically -- what could the first week of the year mean for the stock market in 2018?

SPX Eyes Best Week Since 2016

The S&P 500 is on track for a weekly gain of 1.9%, which would mark its best week since December 2016, and more than triple its average New Year Week gains over the past 50 years. When the index is positive in the first week of the year (looking at returns through Jan. 7, which is typically four trading days), it bodes well for the rest of the year, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Over the last 50 years, the SPX has averaged a rest-of-year return of 9.4% when the first week is positive, compared to a 5.13% gain after a negative start to the year. Further, the index has ended the year in the black 73.3% of the time after a positive first week, compared to a 65% win rate after a negative start.

Plus, the bigger the gain in Week 1, the bigger the average return through the year. When the S&P was up more than 1.5% in the first week -- as it is now -- it went on to average a gain of 11.76%, with a healthy 81.3% win rate. On the flip side, when the SPX started the year with a loss of 1.5% or more, it averaged a rest-of-year return of just 2.56%, and was positive only 58.3% of the time. Volatility -- as measured by Standard Deviation -- was also lower after a Week 1 gain of more than 1.5%, compared to a milder Week 1 gain or a loss to start the year.

Positive Start to the Year Bodes Well for Blue Chips

Likewise, a positive start to the year bodes well for the Dow, which is pacing for a weekly gain of 1.3%. Looking back 20 years, the DJI has averaged a rest-of-year gain of 8.65% after a positive Week 1, and finished the year higher 81.8% of the time. When the Dow started the year in the red, it went on to average a gain of just 3.57% through the end of the year, with a win rate of 66.7%.

But Don't Get Too Excited for Tech

On the other hand, a strong start to the year doesn't necessarily have bullish implications for the tech-rich Nasdaq, which is eyeing its best week since early September, up 2.5% so far. Over the past 20 years, the IXIC has ended the year higher 75% of the time, regardless of a positive or negative Week 1. However, the Nasdaq averaged a rest-of-year return of 8.94% after a positive start, compared to a more impressive average gain of 14.08% after a negative start.