Originally published in Tahoe Daily Tribune’s website: http://www.tahoedailytribune.com/news/opinion/14423885-113/january-market-barometer-stocks
The term “January Barometer” is just one of the many stock market phrases investors hear in the financial media.
It’s important to understand how these types of indicators work and if there’s any real validity to them.
I’d suggest being very cautious about using any seasonal tendencies for your investment strategy.
The January Barometer theory says that if the month of January goes well for the market, the rest of the year will follow through and be a good one for stocks.
The January Effect is a similar term that states stocks, especially small caps, will increase during the month of January.
The first week in January is supposed to be the strongest. This is due to investors selling stocks for tax reasons in December and then doing more buying as the New Year gets going.
This year-end selling is sometimes referred to as the December Sell Off.
One of my favorites is the Super Bowl indicator. The way the Super Bowl indicator works is simple — if a team from the NFC wins the game it will be a good year for stocks, and if a team from the AFC wins, then it will be bad for stocks.
The Super Bowl Indicator has worked most years, about 80 percent of the time.
If you apply serious statistical analysis to any of these seasonal indicators, you’ll find that they don’t stand up to scientific standards.
One problem is that there are not enough data points to draw a meaningful conclusion. Another is what’s known as causation — there’s an old saying that, “correlation does not imply causation.”
A good example here is the Super Bowl Indicator; while it has been 80 percent accurate, the outcome of a football game, even if it’s a really good game, does not have a direct effect on stock prices.
Another consideration is the false positives. For the January Barometer, that would be years when January is down, but the market has still gone up, and the years when January has been strong, but the market has declined, like 2001, when the S&P 500 was up 3.5 percent in January and finished the year in the red, down 16 percent.
There is no evidence that the market’s performance in January has an impact on the remainder of the year, even though it has worked the majority of the time.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.