With the first month of the year showing horrendous losses for nearly every size and valuation segment of the market, the bear growl of the so-called “January Barometer” can hardly be contained.
Simply put, the indicator portends a good year for stock investors if the market boasts a positive return in January. But if stocks tank in the first month of the year, that’s a signal the market is heading lower.
To get a more detailed look at how valuable the January Barometer actually is, an examination of its more recent results is in order. Over the last quarter century, the barometer has correctly predicted the direction of the market 19 out of 26 times, for a 73% hit rate.
The edge enjoyed by believers in the barometer is obvious to anyone with even an elementary background in statistics. The odds that the year as a whole will sport a gain if January is positive is higher than if January is lower. But if one tries to use the January Barometer to predict how the eleven months following January will fare, the track record is likely to be much different.