As Goes January, So Goes The Year?

Mark Hulbert MarketWatch January 27, 2012

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Jan. 27, 2012, 12:01 a.m. EST

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” As goes January, so goes the year?

We should only be so lucky.

What's known as the "January indicator" says a positive month often yields gains for the year. But the indicator isn't what it's cracked up to be, according to MarketWatch's Mark Hulbert, who says other months are actually better leading indicators. Laura Mandaro reports. (Photo: Getty Images)

Even though January is not yet over, it's quite likely that the stock market will end up posting a gain for the month. With three trading sessions left, the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -0.62% is ahead 4.2% for the month, and the S&P 500 index /quotes/zigman/3870025 SPX -0.28% is ahead 4.8%.

Unfortunately, the statistical support for this so-called January Barometer is shaky at best. That doesn't mean the stock market won't rise for the rest of 2012, of course. But it suggests that, if it does rise, it won't be because the stock market is having a strong first month of the year.

The questionable statistical support for the January Barometer emerges from any of a number of studies that analyzed it. Here is a sampling of their findings:

One academic study found that, on a risk-adjusted basis, portfolios that try to exploit the January Barometer end up underperforming a simple buy-and-hold.

Another study found that the January Barometer for the most part does not appear in the historical records of stock markets of countries other than the U.S. This is a big red flag, from a statistical point of view, since no one has a good explanation for why the indicator should only work in the U.S. In fact, its appearance only in the U.S. increases the chances that it was discovered through a simple data mining exercise.

Yet another study found that, even in the U.S., the efficacy of the January Barometer has diminished over time "” adding to the suspicion that it is little more than a fluke.

The statistical case in favor of the January Barometer significantly weakens when the decade of the 1930s is included in the analysis. Yet there is no good statistical reason why it shouldn't be included.

To the extent U.S. stock market history supports the January Barometer, furthermore, it lies in the market's below-average performance following down Januarys. Following up Januarys since 1896, for example, the Dow has risen for the next 11 months 74% of the time "” only a slight improvement on the 67% odds that any year will see an increase. The market's positive tone this January, therefore, tells us little about the rest of 2012.

The January Barometer may do a decent job of foreshadowing a down U.S. market "” a phenomenon that followers refer to as its being a "Bear Catcher" "” but there's nothing particularly unique about its ability to do so. Many other months also have this quality, and yet followers don't refer to the "April Barometer" or the "November Barometer," to name two months that appear from the historical record to possess even stronger "forecasting" abilities than January.

The bottom line? Follow the January Barometer at your peril.

Whether the stock market keeps going up for the rest of 2012 will be a function of whether the prospects for corporate earnings improve above and beyond what investors already expect "” and not the market's rise so far this January.

Click here to learn more about the Hulbert Financial Digest.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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