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.

Let’s suppose, for example, that one predicts that every February-December period from 1975 to present will be profitable. That simple guess turns out to be 86% accurate, which makes the barometer look absolutely amateurish in comparison.

With corporate earnings sinking and bank stocks in a tailspin, there are certainly a lot of reasons to be bearish. But dismal losses in January aren’t one of them. Equities are at rock-bottom prices and we still feel that being short the market is a dangerous position to maintain.

The Monthly Index Report for February 2009

Index

Jan-09

QTD

YTD

Description
S&P 500 Index*

-8.6%

-8.6% -8.6% Large-cap stocks
DJIA*

-8.8%

-8.8%

-8.8%

Large-cap stocks
Nasdaq Comp.*

-6.4%

-6.4%

-6.4%

Large-cap tech stocks
Russell 1000 Growth

-4.8%

-4.8%

-4.8%

Large-cap growth stocks
Russell 1000 Value -11.5% -11.5%

-11.5%

Large-cap value stocks
Russell 2000 Growth

-7.6%

-7.6%

-7.6%

Small-cap growth stocks
Russell 2000 Value

-14.3%

-14.3%

-14.3%

Small-cap value stocks
EAFE

-9.8%

-9.8%

-9.8%

Europe, Australasia & Far East Index
Lehman Aggregate -0.9%

-0.9%

-0.9%

U.S. Government Bonds
Lehman High Yield

6.0%

6.0%

6.0%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

-0.3%

-0.3%

-0.3%

Managed Futures
3-mo. Treasury Bill*** 0.0% 0.0%

0.0%

All returns are estimates as of January 30, 2009. *Return numbers do not include dividends.

** Returns are estimates as of January 28, 2009.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.