Definition
The January barometer is the hypothesis that stock market performance in January predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of December. The January barometer was first mentioned by Yale Hirsch in 1972.
January Barometer
What is ‘January Barometer’
A theory stating that the movement of the S&P 500 during the month of January sets the stock market’s direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year.
Explaining ‘January Barometer’
If an investor believes in the ability of the January Barometer to predict the equity market’s performance, he or she will only invest in the market in the years when the barometer predicts the market will rise, and stay out of the market when it forecasts a market pullback.
While the January Barometer has been seen to produce better than 50% accuracy rates during 20-year periods, it is difficult to produce excess returns by using it because the improved performance by staying out of the market during bad times can be more than offset by larger losses incurred when the barometer incorrectly predicts a bull market.
Further Reading
- The other January effect: International evidence – www.tandfonline.com [PDF]
- The January barometer: further evidence – joi.pm-research.com [PDF]
- The other January effect – www.sciencedirect.com [PDF]
- The monthly barometer of the Indian stock market – www.clutejournals.com [PDF]
- Do seasonal anomalies still work? – jpm.pm-research.com [PDF]
- The predictive value of the signs of January returns: Evidence of a New January Effect – papers.ssrn.com [PDF]
- The other January effect: evidence against market efficiency? – www.sciencedirect.com [PDF]
