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The January Barometer May Not Work This Year

02/05/08 08:21:41 AM
by Mike Carr, CMT

A market adage claims, "As goes January, so goes the year." Are we likely to see more declines over the next 11 months?

Security:   SPY
Position:   Buy

Analyst Yale Hirsch analyzed the calendar and stock market returns and found a high correlation between annual returns and the returns from the month of January. If January closed up, the year was very likely to end higher. If January closed lower, market indexes should also be down at the end of the year.

Since 1950, the January barometer has proven to be correct more than 90% of the time, according to the Stock Trader's Almanac. In those years when January is a down month, the barometer tends to be less accurate, correctly predicting a down close in only 10 out of 21 years. But in up years, the stats are a lot better. Since 1950, there have been 35 up Januarys for the Standard & Poor's 500, and in all but three years, the index closed higher for the full year.

In January 2008, the S&P 500 closed more than 6% lower. There have only been five times that January fared worse. In three of those years, the market finished lower. However, in those three cases and in all five years the market actually moved higher in the next 11 months. For example, in 1978, January closed 6.2% lower but the S&P 500 ended the year up 1.1%, meaning that it increased by 7.3% over 11 months.

While the media tells us that according to the January barometer, the market is likely to close lower for the year, it's important to dig deeper into the numbers. The indicator is actually telling us that even if the year is a down year, the market is likely to be up a little bit from current levels. Now might just be a good time to invest that retirement account money in the S&P 500 ETF, SPY.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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