You may have heard the phrase, "so goes January, so goes the year." The phrase comes from the January barometer and is believed by some to be a predictor of the direction of the stock market for the coming year.
Though it has its detractors, the son of the creator, Jeffrey Hirsch, editor of the "The Stock Trader's Almanac," points out that it has a pretty decent track record.
"Not 100 percent perfect; there have been a couple of errors recently, but we have been in a very tumultuous stock market with overarching influences from the global financial crisis and the second greatest bear market of the Dow Jones Industrials," he says.
"Since 1950, there have been only seven major errors for an 88.5 accuracy ratio. But two of those errors were in 2009 and 2010, where we had down Januaries but up years. If you take into consideration even the seven flat years where the market, the (Standard & Poor’s 500-stock index) was up or down 5 percent or less, it still has a 77 percent accuracy ratio. While not perfect, it gives us a good idea of what will happen for the year," says Hirsch.
The January barometer says as the S&P goes in January, so goes the year. The performance of the S&P 500 in the first week of January trading sets the tone for the month, which sets it for the year.
Yale Hirsch, the inventor of the January barometer, devised the system in 1972 after realizing the impact of the lame duck amendment, the twentieth to the Constitution, which moved Inauguration Day from March 4 to January 20.
The amendment also moved newly elected Senators and Representatives into Congress earlier. Rather than "taking office 13 months after they were elected, they took office a couple of months after the election in the immediately following January. This brought some very important events into January," Hirsch says.
Here's what Ken Fisher wrote in his book "Debunkery: Learn it, Do it and Profit from it -- Seeing Through Wall Street's Money-Killing Myths."
"Just eight times -- 9.5 percent -- January was up, and the year was down. Rare! So, if up-up years happen most, and an up January rarely leads to a down year, does that mean January is predictive? Nope. A down January is basically a coin flip -- historically you get about the same number of up and down years following a down January -- 17.9 percent to 19 percent -- the difference of one occurrence."
He seems to have been counting since 1926, which predates the lame duck amendment. But still, if anything was 100 percent predictive, everyone would know about it and profit from it. At which point, it might stop predicting anything.
For the record, the S&P 500 ended the first five trading days of the year up. On January 3, it closed at 1277.06; January 9, 1280.70.
What do you think? Do you use any predictive indicators to trade or to decide how to invest?
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