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January 2, 2014

The January Barometer

With the New Year upon us, let’s revisit some market lore tied to this time of year.  The January Barometer was first introduced by Yale Hirsch in 1972.  The story goes that if the month of January is up, then…

The January Barometer

With the New Year upon us, let’s revisit some market lore tied to this time of year.  The January Barometer was first introduced by Yale Hirsch in 1972.  The story goes that if the month of January is up, then so goes the rest of the year.  Conversely, if the market suffers in the month of January, then the rest of the year will be tough sledding.

Much analysis has been done on the topic.  Hanlon Investment Management starts the year by taking a closer look at the numbers.  What was found is that from 1950 until 1984, years where the month of January saw a positive return were predictive of a positive return for the entire year with approximately 90% probability.  The years with a negative return in January were predictive of a negative return for the year approximately 70% of the time.  In the intervening time since 1984, market action has caused the predictive power of negative returns in January to fall to around 50%, which is nothing more than chance.  However, positive returns in January have still retained their predictive power for positive returns for the year.

Yet still, there is another group of people who advocate that just the first five trading days of January are predictive of the rest of the year.  We took data from 1950 through 2013 for the S&P 500 Index and then calculated both positive and negative results on a weekly and monthly basis.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time.  A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time.  A negative return in January was predictive of a negative return for the year 54.2% of the time-basically not predictive at all.  A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

But what if we filter the results by requiring both a positive return during the first five trading days of January and a positive return in January for a positive signal?  Conversely, we may require a negative return during the first five trading days of January and a negative return for January to generate a negative signal.   When the first week and the month of January both have positive returns, then the signal is predictive 93.5% of the time for a positive year: a slight improvement over 92.5%.

Even more interesting is that when you require both a negative return in the first week and a negative return in January to give a signal.  Though the number of signals is reduced from 24 to 15, the success ratio improves from 54.2% to 73.3%.  The median and average returns for predicted years are listed in the summary statistics table, along with their respective success percentages, in the graph below.  This will give you a something to ponder as we begin 2014.

January Barometer - 01022014

UPDATE: The S&P 500 Index posted a -0.62% return through the first five trading days of 2014.  

– Posted by Chris

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