What last Friday’s close and this week’s rally mean for the January Barometer.
Last week we posted an interesting article on the January Barometer Theory from Rocky White.
The January Barometer is a theory that suggests that the performance of equity markets in January will predict how it does for the year. Or as White put it, “The January Barometer theory is that the first month of the year sets the tone for the rest of the year.”
White likes to look at these theories than many traders subscribe to in an anecdotal fashion and apply solid research to it. He broke down the times over the last 50 years when the S&P 500 positive and negative and came up with some interesting results.
He found that the theory holds true a high percentage of the time, especially with strong performance. Of the 30 occasions when the S&P 500 was positive in January, it was positive the rest of the year (February through December) 83% of time and averaged a return of 10.88%. Of the 20 occasions it was negative in January it was positive for the rest of the year 65% of the time and averaged only a 2.20% return.
What made this so interesting this year was that the market had a strong January heading into the final week— event the final day— when the markets imploded, having it worst daily performance in several months. The S&P 500 ended up down 58.14 points and the Dow lost more than 600 points. Most analysts attributed the poor day to worries over the Coronavirus.
What piqued our interest—and those traders who subscribe to the January Barometer Theory, as well as those that read the story—was the drawdown moved the stock indexes into negative territory for the month and year.
It was fun watching the last hour of trading as the markets fluctuated above and below the breakeven level.
The bears prevailed on this day and the S&P ended up in negative for the month and year on the final day of trading in January.
Does this mean that the January Barometer will win out and the market will have a major correction in 2020? Some people think so, but for totally different reasons. While it is not foolproof, it is something worth looking at. What makes it even more interesting is the fact that the S&P 500 has rebounded so strong this week, regaining all of the Friday’s losses and setting a new all-time high!
That means that if you want to take a flyer on the Barometer you can do so with the wind at your back (that is, as long as you didn’t look at the story and short the S&P on Monday, in which case you have been stopped out and are cursing the January Barometer).
While not every negative January produced negative returns, those returns where much worse than after a positive January.
As mentioned above, the average return for the S&P 500 from February through December on the 20 occurrences over the last 50 years when the market was negative in January was 2.20%. The S&P 500 is already (as of Thursday’s close) nearly 4% higher from last Friday’s close thanks to this week’s rebound. Further, the S&P has averaged negative returns in February (-0.82%) after a down January and negative returns (-0.35) from February through June.
You can take a short based on the January Barometer, with a roughly 3.75% head start.
