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January Barometer

The January barometer is the hypothesis that stock market performance in January (particularly in the US) predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of December. Probably the best known is “as January goes, so goes the year”. Another says that the first 5 trading days determine the market’s returns for the whole year ahead. And another says that how January performs predicts the direction of the market for the remaining months of the year. The January barometer was first mentioned by Yale Hirsch in 1972. Historically if the S&P 500 goes up in January the trend will follow for the rest of the year. Conversely if the S&P falls in January then it will fall for the rest of the year.

If an investor believes in the ability of the January barometer to predict the equity market’s performance, he will only invest in the market in the years when the barometer predicts the market will rise, and stay out of the market when it forecasts a market pullback. It is difficult to produce excess returns based on this theory. Since the improved performance by staying out of the market during bad times can be more than offset by larger losses incurred when the barometer incorrectly predicts a bull market. January tends to be one of the market’s best months every year, rising an average of 1.3% since 1929, see our January Effect. And because the stock market rises in most years, there’s some inherent bias in the data itself. So, while the barometer works well in predicting up years (some studies even suggest that up Januaries mean up years 85% of the time), it doesn’t do so well in predicting down years. When January is down, the market continues to fall only 46% of the time.

From 1950 till 1984 both positive and negative prediction had a certainty of about 70% and 90% respectively with 75% in total. After 1985 however, the negative predictive power had been reduced to 50%, or in other words, no predictive powers at all. The following table shows the wrong prediction of January Barometer :

Year January S&P End of Year S&P Comments
1946 7% gain Loss 17.6% Start of bad misfire
1947 2.4% gain Loss 2.3% Not right, but no biggie
1948 4% loss Gain 3.5% What the f?
1956 3.6% loss Gain 6.5% Minor
1960 7.1% loss Gain 4.5%  
1966 0.5% gain Loss 13.5%  
1968 4.4% loss Gain 12.6%  
1970 7.6% loss Gain 8.4%  
1978 6.2% loss Gain 7.7%  
1982 1.8% loss Gain 16.8%  
1984 0.9% loss Gain 2.3%  
1987 13.2% loss Gain 9.9%  
1990 6.9% loss Gain 0.3%  
1992 2% loss Gain 6.6%  
1994 3.3% gain Loss 4.6%  
2001 3.5% gain Loss 13%  
2003 2.7% loss Gain 26.4% significant
2005 2.53% loss Gain 8.36% Minor disappointment
2009 8.5% loss Gain 35% Worst loss
2010 3.9% loss Gain 12.6%  

5 wrongs for the most recent decade:

Year 2001: gain of 3.5% but loss of 13% year end.

Year 2003: The S&P has a loss of 2.7% but the S&P finished with significant  26.4% gain.

Year 2005: there was a minor misfire in 2005.

Year 2009: the January barometer is a big fake. January 2009 saw the S&P 500 fall 8.5%, only to finish with one of the best years on record as stocks soared 35% the rest of the way. Anybody who followed the barometer religiously in the year 2009 missed out on one of the most profitable market swings in a generation.

Year 2010: After a 3.9% January loss, the S&P finished with a 12.6% gain.

The year 2011 is not finished yet, what 2011 is going to be? What about 2012? Evidence also suggests that other months, such as April and November, are just as good at predicting the year as January. So why does January get all the attention? Read our other theories such as the January effect, Presidential Cycle and Halloween indicator.

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