JANUARY BAROMETER ?
On Dec. 16, I wrote:
“An old market saying states; “as January goes, so goes the year”. This barometer is fairly reliable at predicting market gains following a strong January [86%] than predicting losses following a down January [47%]“.
The market started 2010 off well, with the Dow Jones Industrial Average (DJIA) rallying 1.75% by the middle of January. But then the market reversed sharply, and when January was all said and done, the Dow was down about 3.5%. This is not a good omen for the rest of the year, according to the January Barometer. It is said that January sets the tone for the rest of the year, and the numbers seem to indicate that this is true.
Below is a table showing how accurate this indicator has been. It considers data for the Dow since 1950, and summarizes returns from February through the rest of year, depending on whether the DJIA was positive or negative for January. The results are striking. In the 39 times that January was positive, the rest of the year averaged a return of 9.76% and was positive more than 80% of the time. If January was negative, then the average return fell short of 1.5%, with positive returns occurring less than half the time.
We know that January tells us what to expect for the rest of the year, but does it tell us anything about the shorter term? To find out, I focused instead on returns only for February. Again, January proves to be a very accurate indicator. If January is positive, then February is usually positive, with an average return of 1.20%. But if January is negative, then February is also usually negative, averaging a loss of 1.64%.
Needless to say, this has not been an analysis that inspires much optimism for the next month, or the rest of the year. However, there are always exceptions to these figures. Last year started off pretty poorly, with negative returns in both January and February, but the Dow finished extremely well, for a gain of 30%. This is a pattern similar to 1982 and 2003, which were the beginnings of long-term bull markets.
