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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January Early Warning for Rest of Year

We now know that the first five days of the year were down which became a popular indicator for the year as a whole by Yale Hirsch of Stock Traders Almanac fame. While waiting for the month of January to conclude, I went back and looked at the first five days of every down year since 1951. Then I looked to see if January as a whole was down. Finally, I found all the times where January’s weakness exceeded the prior year’s December low as well as when the entire first quarter’s low was below the prior year’s December low.

The idea behind the research was to see which triggers were common in poor years for the stock market, not necessarily the accuracy in all years.

Listed below are all down years for the S&P 500 since 1951. Here is the key for the abbreviations used.

5 – First five days of the year were down

Jan – January as a whole was down

Dec – January’s weakness undercut the lowest closing price of December

Q – The low of the first quarter exceeded the low of prior fourth quarter’s low

2016 (so far) – 5, Dec

2015 – Jan

2008 – 5, Jan, Dec, Q

2002 – Jan, Dec, Q

2001 – 5, Q

2000 – 5 , Jan, Q

1994 – Q

1990 – Jan, Dec, Q

1981 – 5, Jan, Q

1977 – 5, Jan, Dec, Q

1974 – 5, Jan, Q

1973 – Jan, Q

1969 – 5, Jan, Q

1966 – Jan

1962 – 5, Jan

1960 – 5, Jan

1957 – 5, Jan

1953 – 5, Jan

As you can see, almost every single down year in the S&P 500 saw January as a down month. 1994 and 2001 were the exceptions. That’s pretty remarkable. Of course, that’s not saying that just because January is down the whole year will be down. It just puts us on guard to look for other indicators.

What we also see is that for the more significantly down years, not only is January down, but the low of January and/or the low of the first quarter exceeds the low of the prior December.

2016 has gotten off to the worst five day start in history, but it’s still way too early to say it’s a harbinger of things to come.

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Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

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Early Warning System & January Barometer

With the first five days of January officially in the books, the Early Warning System (EWS) pioneered by Yale Hirsch is flashing a positive sign for the rest of January as well as 2015. The theory says that as go the first five trading days of the new year, so goes January. And as goes January, so goes the year.

With help from my friend Carter Worth of Stern Agee (Carter did the heavy lifting and I peppered him with questions), he examined both the first five days as well as January since 1927. If the EWS was positive, there is a 76% chance that the whole year will be positive. If the EWS was negative, then the year was a 50/50 toss up.  Any random year has a 67% chance of being up. So right now, history says there is a 76% chance of 2015 being an up year.

Those stats alone seem valuable, but they left a big question unanswered for me. If the EWS was positive and then January was positive, how much did January’s return borrow or steal from the full year? Remember, we really don’t know the full results until January 31 and by that time, the stock market could already be substantially higher and potentially cannibalize the full year results.

After continuing to annoy my old friend Carter, we learned that when January is negative, the rest of the year is actually positive by an average of a paltry 1.6%. However, when January is positive, the rest of the year is also positive by an impressive 8.6%.

Although stocks began the year on a sour note, the bulls rose to life over the third, fourth and fifth days of the year to close the first five days marginally higher. As I type this, January is currently down less than 1%. The next three weeks are obviously key for this historical study in determining the outcome of 2015. After watching the Dow reach my longstanding 18,000 target, I am now patiently waiting for five consecutive closes above 18,000 to set the stage for a run to at least 20,000.

My own 2015 Fearless Forecast is being edited now and one thing is for sure, I do not see a repeat of 2014 in any asset class!

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