Should You Rely on the January Barometer To Predict The Market
January has almost passed, and investors are looking ahead to what 2022 will bring. If you have experience in the markets, you’ll know the concept of the January Barometer, and in this post, we’ll dig a little deeper into this theory and try to understand it.
It’s impossible to predict the market, but every investor still wishes to know the future. Traders' desires to know the market’s future have resulted in many theories and concepts springing up over decades. The January Barometer theory states that what happens in January, so goes the year.
Many traders believe the S&P500 performance during January can mirror the performance of the market over the coming year. Since we live in a fractal world, the first minute, hour, week, and month of the year often act as a microcosm for the rest of the year. If January has a terrible month, the markets for the rest of the year will also suffer. If January brings us those long-awaited gains, further gains will follow as the year unfolds.
The theory of the January Barometer was first put forward by Yale Hirsch in the Stock Trader’s Almanac in 1972. Those who adopt this theory into their own investment strategies cite data showing that between the years 1966 and 2001, there has been an inarguable correlation between the S&P 500 returns in January and those of the rest of that year.
How can the January Barometer predict where the market is going?
We may find the answer in the investment practices of many major investors, especially institutional investors. January is the month when most investors will readjust their portfolios, rethink their outlook for the year to come, and attempt to make a fresh start. Many institutional investors lock in profits prior to the year ending and then reopen their positions in the new year. Because of this capital flowing into the market and many large portfolios being readjusted, the moves made in January may predict where the market will point during the following year.
Whilst there is indeed a correlation between January returns and the returns experienced for the rest of the year, it is important to factor in that, as a general rule, markets are always trending upward. It is possible that the concept of the January Barometer is the product of human psychological illusion. To support this school of thought, critics cite that during the same years of 1966 and 2001, the U.S equity markets generated an annual return of 75%. So, we could simply explain the January Barometer as a byproduct of the general upward trend that the S&P has moved in for decades.
The January Barometer is just an extra tool in your tool belt and shouldn’t be used as a standalone indicator (same advice for any other indicator). So far in 2022, the January Barometer points down or sideways, with the end of January still to be decided. In other words, it looks to be a down or sideways year for the stock market.
In more recent times, the January Barometer has yielded a mix of results and so with January now upon us, it is important to use various indicators to gauge where this market will take us over the coming 12 months instead of just using the January Barometer. Investors should use a range of different indicators to inform their own investing thesis and refuse to rely on the insights yielded from any single indicator, including the January Barometer. For those of us who are investing in the market, it will be interesting to watch and see where 2022 takes us.
Update February 1st:
Now the month of January is over, we can look at the full month to get an idea of how the year may go. The market moved violently to the downside coming into a gap that was left in the chart in October of last year. The move was so violent it gapped again to the downside, breaking all the lows of September/October 21'. The move was extremely fast and quickly bounced back to fill the newly formed gap. From there, the market put in a bottom, and into the end of the month, it confirmed a large W market structure bottom.
They say "As January goes, so goes the year" and in mid-term election years, the markets have often been sideways or down years. This January Barometer has created a similar outlook for this year, with violent moves to the downside, plenty of sideways ranging, and ending off the year with a push to the upside. If this plays out in the year, then the year's bottom would coincide nicely with the mid-term elections, with the first bottom coming in September, and the double bottom coming in during the midterm elections in early November.
The outlook for this year looks eerily similar to other Midterm election years as shown in this year's Stock Trader's Almanac. (Credited and linked below)
There are no guarantees in any market, this is just another statistical tool to help you understand where the market may go in the coming year, and what you should expect.
Brian added on his Twitter:
And shared his updated January Barometer report:
View full Twitter thread here:
For more information on the January Barometer, check out this helpful blog post at Investopedia on the January Barometer and pick up a copy of the Stock Trader's Almanac 2022 by Jeffrey A. Hirsch & Christopher Mistal.
That's all for now, see you on the site!