The January Barometer

'The January Barometer': Market Under Pressure?

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The January barometer states that, as the S&P 500 goes (i.e., performs) in January, so goes the rest of the year.

For the record, the S&P was down 3.3% in January. A down January is supposed to indicate a down year ahead for stocks.

Now, I know what you are thinking ... this is one of those stupid indicators that really has no connection to the market, and this is one of those coincidental things.

In many cases, this would be true. But when looking back into history and testing this “theory,” you can’t ignore the results.

Since 1950, there have been 20 down Januaries in the S&P.  Twelve times, the market finished the year down.  Seven times, the S&P battled back to finish unchanged for the year.

Only once in those 20 years did the S&P finish higher after a losing January.

Wow, those numbers are enough to make you take a second look at this. So, I did!

A Confirmation From the Dow

I looked at the same theory, but this time I used the Dow. Guess what I found ... the numbers were pretty much the same, especially on the downside.

The really scary thing was that, every time the Dow was down in January, there were only four times it finished up for the year.

Darn thing was right 95% of the time!

You might talk about coincidences, like the supposed "Super Bowl Indicator," which says the market is almost always up when an AFC team wins the Super Bowl.

This may be true; however, there is really no connection between the two.

There is no explainable reason for the market to be up when the AFC wins the Super Bowl. They are totally unrelated!

So, when looking at the January barometer, we must find an explanation that indicates some type of logical pattern or relationship that connects the two.

You need to look no further than another January theory called the "January effect."

An 'Effective' Indicator?

The January effect says that, in the first week or so in January, the market will be up.

This is due to the fact that many people use the week between Christmas and New Year's to dump their losing positions so that they can get the tax write-off from the trading losses.

After the New Year, the positions are bought back into the portfolio. All of this “re-buying” creates an increase in demand, and the surge propels the market higher in the first week or so in January.

Now, if those who sold out their positions between Christmas and New Year's decided not to buy those positions in January, then there would probably be no catalyst for the buying in early January that would get the year off to a good start.

You might say that a lack of buying does not necessarily lead to an increase in selling. But, let me tell you from experience, it does!