January Barometer....

luckystar2006

Source: Equity Clock

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Stocks sold off on Friday, closing one of the weakest months for the major equity benchmarks since May of 2012.   The S&P 500 Index closed lower by 3.56%, while the Dow Jones Industrial Average closed down by 5.30%.   The losses on the month have ignited discussions pertaining to the January Barometer, which states that the return for  equity markets during the first month of the year sets the direction for the rest of the year; a losing January suggests that equity benchmarks, such as the S&P 500 and Dow Jones Industrial Average, will continue to decline throughout the remainder of the year.   If you believe some of the media reports released over the last few days, this indicator has been correct over 70% of the time, 77.6% to be exact, as it pertains to the Dow Jones industrial Average over the last 85 years; the direction of the return during the first month of the year has determined the direction of the return for the entire year over three quarters of the time.   While this is true, the fact that January’s return is included in the full year result diminishes the value of this indicator as a predictor of the direction of equity markets following the month of January.   Unfortunately, the indicator cannot be applied retroactively to the beginning of the year to help investors avoid a potential loss on the year.   If this indicators were to hold any value whatsoever,  the performance of equity markets following a negative January performance would have to be determined.   Over the last 85 years, the Dow Jones Industrial Average has charted 29 negative January returns for an average loss of 3.87%.   Following those 29 negative results, losses continued through the remainder of the year 14 times, or 48.3% of the time.   This suggests that the success rate of this indicator following a negative January return is no better than the flip of a coin.   The returns for the Dow Jones Industrial Average between the end of January to the the end of the year following a negative first month of the year actually average a gain of 2.06%.

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