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Is the Stock Market’s ‘January Barometer’ a Reliable Indicator?

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January 5, 2016
Is the January Barometer an accurate predictor of stock market performance for the full year?

As volatility rips through global markets to start the new year, some traders may look to forecast the 2016 market climate—that’s right, the whole year—by week's end and month's end. Such historically minded traders have the “January Barometer” and the “First Five Days” in mind.

The so-called "January Barometer," devised by the Stock Trader's Almanac back in 1972, famously says: As the S&P 500 (SPX) goes in January, so goes the year. Simply put, a gain at the end of January has historically tended to be bullish for stocks by year-end, while month-end returns in the red have sometimes warned of a bear emerging from hibernation. The “First Five Days” takes a similar approach.

Track Record?

"The January Barometer has registered eight major errors since 1950 for an 87.7% accuracy ratio," says Jeffrey A. Hirsch, editor of the Stock Trader's Almanac (figure 1).

Hirsch points to politics as a major factor behind the January Barometer's workings.

"January’s prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene, while the President gives the State of the Union message, presents the annual budget, and typically sets national goals and priorities,” Hirsch says. “These events can affect our economy, Wall Street, and much of the world. Add to that January’s increased cash inflows, portfolio adjustments, and market strategizing, and it becomes apparent how prophetic January can be.”

January Barometer charted by the Stock Trader's Almanac

FIGURE 1: HOW’S IT STACK UP?

A historical view of the Stock Trader's Almanac “January Barometer.” For illustrative purposes only. Past performance does not guarantee future results.

A Quick Read

For traders too impatient to wait for the end of the month, January's "First Five Days" are sometimes used as an early warning system for insight into full-year market performance, Hirsch says. The accuracy rate isn't too shabby, either. "The last 41 ‘First Five Days’ gainers were followed by full-year gains 35 times, for an 85.4% accuracy ratio and a 14% average gain in all 41 years," Hirsch says.

U.S. stocks tumbled to start 2016—a drubbing once again at the hands of Chinese news that provides a not-so-gentle reminder about the intimacy between all major markets.

Don’t Lose Focus

Although the historical numbers behind the January market weather checks are impressive, traders need to stay focused on big-picture fundamentals, says JJ Kinahan, chief market strategist at TD Ameritrade.

"It’s an interesting and fun fact, but I think traders put more faith in job statistics, earnings, and what's going on with the economy overall,” Kinahan says. The next monthly payrolls snapshot hits on Friday, January 8.

For some investors, the domestic picture will be a key factor to monitor, including if continuing stabilization and improvement in U.S. economic numbers could lead to a shift in investor sentiment in 2016. TD Ameritrade clients can track economic numbers by logging into thinkorswim® and going to MarketWatch > Calendar > check Events.

"In 2015, some people were very jittery with reinvestment," Kinahan says. "Hopefully, the housing sector and the job market have stabilized, which gives people confidence. Investors will be more willing to come out of cash and stay with their investments longer.”

If so, there’s a chance that attitude could continue throughout the year. 

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