Our next school term starts on May 10th 2021!
The January Barometer
The January Barometer is a stock market study created by Yale Hirsch in the late 1960’s. It states that “as January goes, so does the rest of the year”. Throughout history we’ve seen a correlation between how the S&P 500 performs in January with performance over the course of the year. Since 1950, January performance has been 85.7% accurate in predicting the year end close according to the Stock Trader’s Almanac.
At TRI we like to create a January Barometer study to give us a roadmap of how the market may look at different points throughout the coming year. While we don’t anticipate an exact match, this study is helpful at identifying key areas and times where the market may pivot. Combining this tool with other technical analysis can help strengthen our bullish or bearish case.
To create the study we use the SPY and watch the hourly price action of the entire month and then stretch that price action out over the entire year, with each week representing 1 quarter of the year. We then look for correlations with other cyclical events such as summer rallies or tax loss selling season.
What does 2021 Look Like?
2021 began on a down note as the S&P opened up slightly higher than the previous day but immediately began heading lower. After a pretty significant down move it ended up closing down -1.77%. After that drop it did find a bottom and recaptured the down move ultimately closing the first week up 1.65% from the year open. Week two consisted of sideways consolidation with a drop late in the week to close down -0.79%. Price began moving higher again in week three and finished 1.12% up near all time highs before falling substantially again in week four. Ultimately the entire month finished -1.4% to the downside.
Price action throughout the month suggests there may be a February buy opportunity in the 1st quarter once the market finds a bottom after it’s initial down move. The old saying “sell in May and walk away” comes to mind as we can see the market begins a slightly downwards consolidation in the 2nd quarter. The market should again find a bottom heading into quarter 3. This makes sense as it aligns with a summer rally that we typically expect to see every year. Quarter 4 price action is a little more alarming as the barometer projects a strong move to the downside as we head into the end of the year. While tax loss selling season usually contributes to a selling off in quarter 4, this price action is also suggesting that we may be looking at a larger correction in the market. Only time will tell they say so make sure to check back with us a year from now to see what happened.
2020 was a wild year in the markets that was greatly affected by both a global pandemic and the US Presidential Election. The January Barometer projected a relatively flat year closing at near the same level it opened. It suggested a slight down move early in the year followed by a powerful surge into the summer rally. Covid triggered a panic sell off in March which resulted in a far deeper correction than the barometer suggested, but nevertheless it was a relatively accurate road map that projected the rally that did happen. After that the study was fairly accurate heading into late summer with another down move and then a pre-election pivot. However it became disconnected heading into the end of the year by projecting a failed rally when in reality the market remained strong into the year.
Studies such as the January Barometer should be taken with a grain of salt and should never be used as the only reason to take a trade. It can be a great tool to help investors get their bearings on potential future market activity but we must still combine this analysis with other tools and proper risk management in order to improve our chances of a successful outcome.
Want to learn more? Join our school program at https://join.therationalinvestor.com/course-waitlist