02/17/12 The performance of the broad stock market during the month of January has been viewed as an indicator for the performance of the market for the year for almost 40 years; however, the last decade has not been kind to this prognosticating tool.
History of the January Barometer
Devised in 1972 by the Editor in Chief of the Stock Trader’s Almanac, the January Barometer states that as goes the stock market in January, so goes the market for the year. The theory was back tested to 1950 using the S&P 500 Index as a proxy for the stock market.
According to the Stock Trader’s Almanac, since 1950 the indicator has produced an 88.5% accuracy ratio (including years with flat returns – defined as less than +/- 5%), with only seven major errors. When flat years are excluded the indicator yields a 77% accuracy ratio.
Additionally, the Stock Trader’s Almanac goes on to note that the full year direction of the market followed January’s direction in 11 of the last 15 presidential election years for a 73.3% accuracy ratio.
Not So Fast, My Friend…
Of the seven major errors sited, four have occurred since 2001. Additionally, three of the 11 flat year errors occurred since 2001. Said differently, since 2001, the January Barometer has been correct three times for a 27.3% accuracy ratio.
When comparing the 2000’s to other decades and including flat years as errors, the January Barometer was wrong once during the 1950’s (90% accuracy ratio); three times during the 1960’s (70% accuracy ratio); twice during the 1970’s (80% accuracy ratio); three times during the 1980’s (70% accuracy ratio); and twice during the 1990’s (80% accuracy ratio). In other words, the indicator was correct on average 78% of the time for 50 years.
What Investors Need to Know
While discussion about the January Barometer can be interesting party conversation, the reality is that since 2001, this indicator has not worked well. Unfortunately, this is not an uncommon phenomenon. Prognostication tools tend to stop working after a certain amount of time. The reason being that once a tool becomes well known, its ability to forecast ceases to work since everyone is using it or following it.
We feel that a better strategy is to follow a disciplined, methodical process for determining stock market exposure. We cannot control what the stock market will do, however, we can control how we respond to the market. By having a systematic approach to investing, we are able to control our emotions and invest appropriately given current market conditions.
Please call me at (205)989-3498 or email me if you have any questions. Myself or anyone on our team would be delighted to talk with you.