How Accurate Is the January Barometer?

The beginning of the year is a special time that rightly attracts much attention. The January effect is mostly over by now and hopefully you were able to trade this phenomena profitably. It is too bad it only comes around once a year.

There are a few other similar patterns for January. 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.

Mark Hulbert showed a few days ago in this column that the 5 first trading day pattern simply isn’t true. In fact, the only one that does have validity historically is the third one listed above. The January Barometer says that the performance for the first month has a predictive quality for the returns generated between the second and twelfth months.

Because of the positive bias of the market, this indicator works best when it predicts a bullish scenario for the remaining 11 months of the year. From 1940 to 2008, January’s return was positive 43 separate times. Of these, 86% of the time the next 11 months were also positive. On the other hand, in only 40% of the cases when January was negative was the rest of the year also negative. The overall accuracy of the January Barometer within that time range was 73.9%.

So with an almost 75% historical accuracy rate, we’ll have to wait until the end of this month to see what it augurs for the rest of the year.

Below is a look at the raw data from 1940 to 2008:

. Year Jan Return % Rest of the Year Correct? . 1940 -3.5 -12.2 YES . 1941 -4.8 -13.7 YES . 1942 1.4 10.9 YES . 1943 7.2 11.5 YES . 1944 1.5 12.1 YES . 1945 1.4 28.9 YES . 1946 7 -17.6 NO . 1947 2.4 -2.3 NO . 1948 -4 3.5 NO . 1949 0.1 10.1 YES . 1950 1.7 19.7 YES . 1951 6.1 9.7 YES . 1952 1.6 10.1 YES . 1953 -0.7 -6 YES . 1954 5.1 38 YES . 1955 1.8 24.2 YES . 1956 -3.6 6.5 NO . 1957 -4.2 -10.6 YES . 1958 4.3 32.4 YES

. 1959 0.4 8.1 YES . 1960 -7.1 4.5 NO . 1961 6.3 15.8 YES . 1962 -3.8 -8.3 YES . 1963 4.9 13.3 YES . 1964 2.7 10 YES . 1965 3.3 5.6 YES . 1966 0.5 -13.5 NO . 1967 7.8 11.4 YES . 1968 -4.4 12.6 NO . 1969 -0.8 -10.6 YES . 1970 -7.6 8.4 NO . 1971 4 6.5 YES . 1972 1.8 13.6 YES . 1973 -1.7 -15.9 YES . 1974 -1 -29 YES . 1975 12.3 17.2 YES . 1976 11.8 6.5 YES . 1977 -5.1 -6.8 YES . 1978 -6.2 7.7 NO

. 1979 4 8 YES . 1980 5.8 18.9 YES . 1981 -4.6 -5.4 YES . 1982 -1.8 16.8 NO . 1983 3.3 13.5 YES . 1984 -0.9 2.3 NO . 1985 7.4 17.6 YES . 1986 0 14.3 YES . 1987 13.2 -9.9 NO . 1988 4 8 YES . 1989 7.1 18.8 YES . 1990 -6.9 0.3 NO . 1991 4.2 21.3 YES . 1992 -2 6.6 NO . 1993 0.7 6.3 YES . 1994 3.3 -4.6 NO . 1995 2.4 30.9 YES . 1996 3.3 16.5 YES . 1997 6.1 23.4 YES . 1998 1 25.4 YES

. 1999 4.1 14.8 YES . 2000 -5.1 -5.32 YES . 2001 3.46 -15.95 NO . 2002 -1.56 -22.15 YES . 2003 -2.74 29.94 NO . 2004 1.73 7.41 YES . 2005 -2.53 8.36 NO . 2006 2.55 10.8 YES . 2007 1.43 2.12 YES . 2008 -6.09 -34.48 YES . . 73.9% accurate prediction

Comments

[John Lounsbury:]

Babak - - -

Interesting study. A note: If you can do your tables in Excel and copy them into your text you will get much more readable tables.

Jan 13 11:04 AM

[jgonion:]

January Myth Debunked:

Take a good hard look at the numbers presented in this piece. It is true that the January return correlated with the rest of the year 72.5% of the time 50/69 years (0% return in 1986 has no direction).

I propose another predictor of the market. It will always go up. Looking at the numbers above you will notice that this simple predictor is also correct 50/69 years (72.5% of the time).

From this, it should be clear that a positive return in January has zero predictive value.

Now, let's look at negative returns in January. These correctly predict the direction of the market 52% (13/25 down Januaries) of the time. I can't help but notice that flipping the Nickel in my pocket will achieve a similar prediction rate.

So, let's recap: A positive return in January tells you nothing, and a negative return in January tells you nothing.

Reader Beware...

Jan 13 11:53 AM

[Dave Wrixon:]

You might also observe that it seems to be a lot less true than it used to be.

Isn't it just the old caveat?

Past Performance is No Guarantee of Future Results

Jan 13 01:41 PM