Over the coming days, I expect a great deal to be written about the January barometer. This theory states that as the month of January goes, so goes the market for the year. With the S&P 500 finishing January with a 3.7% loss, prepare for the bears to use this as ammunition to take the market lower.
Before we jump on board, we should examine the metric further. Starting with 1950, we can measure both January and the ensuing full year’s performance 60 times. Across those 60 years, the direction of January has predicted the full year performance 47 times, for a success rate of 78%. (My definition of predicting the full year is if January is lower and the full year lower the barometer is correct, likewise if January is higher and the full year higher. If January is down and the full year higher, or January higher and the full year lower, I see the barometer as incorrect.)
A 78% success rate is very impressive and helps explain why so many follow this metric.
But instead of looking at the data broadly, we can also differentiate between occasions where the market was higher in January from those times when the market was lower. Since 1951, the month of January has been higher 37 times, and led to a positive year 34 times, for a respectable 92% success rate. However, since January 2010 is showing a loss, this interpretation does not apply.
However, if we focus on the number of years when January was lower, which is 23, only 13 of them showed annual losses—a 57% success rate. While the bears will highlight how negative Januarys in 2002 and 2008 led to eventual annual losses of 23% and 38%, respectively, they ignore that the false signals in 2003 and 2009 had investors miss annual returns of 26% and 24%, respectively.
Never one to believe in using the calendar to dictate returns, I feel we should ignore the headlines that definitively declare that 2010 will be a down year because January ended lower. A focus on prudent risk management and proper stock picking will lead to positive results over market cycles. The talk about calendar patterns may be interesting, but often it is more dependent on data mining than analytical rigor.
Before we jump on board, we should examine the metric further. Starting with 1950, we can measure both January and the ensuing full year’s performance 60 times. Across those 60 years, the direction of January has predicted the full year performance 47 times, for a success rate of 78%. (My definition of predicting the full year is if January is lower and the full year lower the barometer is correct, likewise if January is higher and the full year higher. If January is down and the full year higher, or January higher and the full year lower, I see the barometer as incorrect.)
A 78% success rate is very impressive and helps explain why so many follow this metric.
But instead of looking at the data broadly, we can also differentiate between occasions where the market was higher in January from those times when the market was lower. Since 1951, the month of January has been higher 37 times, and led to a positive year 34 times, for a respectable 92% success rate. However, since January 2010 is showing a loss, this interpretation does not apply.
However, if we focus on the number of years when January was lower, which is 23, only 13 of them showed annual losses—a 57% success rate. While the bears will highlight how negative Januarys in 2002 and 2008 led to eventual annual losses of 23% and 38%, respectively, they ignore that the false signals in 2003 and 2009 had investors miss annual returns of 26% and 24%, respectively.
Never one to believe in using the calendar to dictate returns, I feel we should ignore the headlines that definitively declare that 2010 will be a down year because January ended lower. A focus on prudent risk management and proper stock picking will lead to positive results over market cycles. The talk about calendar patterns may be interesting, but often it is more dependent on data mining than analytical rigor.
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4 Comments
Top 78%
marketfeel
Feb 01 at 11:05AM (EST)
good stuff - thanks for the stats.
Top 1%
VicthebrickV
Feb 01 at 11:20AM (EST)
Point taken and agreed. So what stocks are going to fit the criteria?
If a V shaped recovery no longer being considered, then are value plays the better choices vs growth?
Top 1%
VicthebrickV
Feb 01 at 11:24AM (EST)
Just to add... the value vs growth...
This might explain why the Nasdaq is performing worse than the S&P.
Top 1%
guliamo
Feb 01 at 11:55AM (EST)
Great insights. Thanks Epic.