BarroMetrics Views: The January Effect
The common view is: “the January Barometer holds that the stock market’s direction from February through December is foretold by its direction during January” (Mark Hulbert).
Mark goes on to phoo-pha the effect saying: “Consider the indicator’s record using the Dow back to its inception in the late 1800s. Over the ensuing 113 years, it has been correct 72 times–for a success rate of 64%.” He then says that 64% is no better than a random result.
Only problem is, he is testing incorrectly.
The January Barometer was identified by Jeffrey A. Hirsch of the Stock Traders Almanac. His version of the Barometer is this: “the January Barometer only came to be after the twentieth “lame duck” Amendment to the Constitution was passed in 1933. In 1972 when we discovered the January Barometer and first published it in the Stock Trader’s Almanac we declared that the lame duck Amendment “changed the political calendar and the January Barometer was born.”
In the 2010 Almanac on page 42 we write: “Down Januarys are harbingers of trouble ahead…. Though some years ended higher, every down January since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year.”
The problem is the re-statement takes us only a little farther: we may not have a down year but we will have after the January close either:
- a bear market
- a 10% correction or
- a flat year
i.e. - the market may go down or rally around? (G).
That is all tongue in cheek. In fact that Barometer is quite useful. If we accept that we are in a sideways congestion mode when the DJIA closes below its December close, and we ask:
- How often will the market decline and
- How much will be the extent of that decline?
we get some impressive answers. The market has been down sometime during the year over 90% of the time and the average decline runs from 10% to 16.9%.
So here are the results of the study I ran:
TIME: The period of the decline (i.e. when the decline occurs) does not provide any statistically significant information. But if if we assume a 13-week swing correction is in place, we can expect the market to bottom late March to early April.
PRICE: Assuming we see a 10% to 16.9% decline from the Jan. highs, we have the following ranges:
- S&P 1036 to 956
- DJIA 9657 to 8916
In the free weekly video, I have provided a narrower price range and more specific dates for a possible bottom for the S&P.
Refer this blog post to a friend or colleague…
