January Barometer – Another Indicator to Debunk or Not

During the end of January to early February each year, there is an annual discussion regarding the January Barometer, another indicator which supposedly has a great track record of predicting the return for the calendar year. This indicator was created and made popular by Yale Hirsch, founder of the Stock Trader’s Almanac. Basically, it says that as January goes, so goes the calendar year.

Simple enough, right?

The Almanac claims a “success rate” in excess of 80% which seems pretty darn good, at least on the surface. The first problem is that their research includes the month that just concluded. In other words, you couldn’t act on the January Barometer until February 1 to stay invested the rest of the year, but Hirsch included the entire year in his calculations.

Adding on to that, he never calculated just February through December returns to see if there was really a predictive edge. Finally, to make the study worthwhile, you would have to compare it to any random year being up or down.

There are all kinds of ways to massage and the manipulate the data. I am going to start with some big picture summary stats courtesy of Ari Wald from Oppenheimer, one of my favorite weekly reads on the markets and an all around nice guy.

Since 1928, February through December has been up 71% of the time. That’s the random number to compare. The median gain has been +8.2%.

Since 1928, February through December has been up 78% of the time following a positive January. The median gain has been +8.6%.

Since 1928, February through December has been up 59% following a negative January. The median gain has been +2.4%.

Based on the numbers from Oppenheimer, the January Barometer certainly looks actionable after an up January. Now, let’s massage the data a little differently and more granularly thanks to some help from my long-time industry friend Tom McClellan of McClellan Oscillator and Market Report fame with some truly outside the box analysis.

Tom broke up the January Barometer into various periods to see if there was consistency. Here is what he found.

From 1928 to 1949, an up January led to the rest of the year being up 50% of the time.

From 1950 to 1969, an up January led to the rest of the year being up 80% of the time.

From 1970 to 2019, an up January led to the rest of the year being up 64% of the time.

From 2000 to 2019, an up January led to the rest of the year being up 55% of the time.

This suggests that the 1950s and 1960s were more of an outlier than the norm. Like the First 5 Days of January barometer, this barometer looks much better on the surface versus random than when you dive into the details. As with so many historical trends, the markets have arbitraged the edge away over time.

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
If you have at least $250,000 of investable assets and would like to schedule a complimentary meeting, call, or video conference with me, please click on my calendar here email me at Paul@investfortomorrow.com or call the office directly at 203.389.3553.

Comments

  1. Paul Franson says

    Thank you for the interesting analysis. Bearing in mind the axiom that we should ‘make things as simple as possible – but no simpler,’ the January Barometer appears, not surprisingly, to be an over-simplification.

    I have a question about the breakdown of time periods – I’m wondering if there is a typo:
    1928-1949 – ok
    1950-1969 – ok
    1970-2019 – is 2019 supposed to be 1999? If not, it seems odd that the last 2 periods overlap.
    2000-2019 – ok

    • Paul Schatz, President, Heritage Capital says

      Thanks for the comment and question Paul.
      I, too, thought it was a typo at first.
      The research was my friend, Tom McClellan’s and I will be trying to massage it a different way shortly.

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