The January Barometer

Professor John J. McConnell

Consumer Warning

In my opinion, stock prices CANNOT be predicted.

The Wall Street Adage After consulting the ‘January Barometer’ Wall Street meteorologists

have concluded the forecast for the stock market this year is decidedly pleasant.

--- Business Week,1984

Another seasonal signal worth watching --- and possibly playing through options --- is the January Barometer, or the strong tendency of stock indexes to rise in years when they were up in January and fall when the first month is down.

--- Barron’s, 1999

From mid-January through early February, the stock market came under some heavy selling pressure. A negative January barometer has us concerned for the coming months, and the year as a whole.

--- Barron’s, 2010

What is it?

“The barometer, which indicates that as January goes, so will the market go for the total year, has proven correct in 20 of the last 24 years. The performance of this indicator becomes even more striking when you consider its simplicity, coupled with the fact that it is making its prediction eleven months in advance.”

--- Yale Hirsch (1974)The Stock Trader’s Almanac

One More Quote…

“On the one hand, I am a believer in the efficient market hypothesis,” said John J. McConnell, a finance professor at the Krannert School of Management at Purdue University who has studied the January phenomenon. “On the other hand, given that the other January effect was such a powerful predictor of the market during the past year, I am chastened. The market has a way of humbling us all.”

--- The New York Times, 3 January 2009

From Streetlore to Market Regularity

For the 152 years from 1857 through 2008.

- 100 positive Januarys:- Next 11-month return = 11.01%

- 52 negative Januarys:- Next 11-month return = 2.84%

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-0.600000000000001

-0.400000000000001

-0.200000000000001

-5.55111512312578E-16

0.199999999999999

0.399999999999999

0.6

Calendar years

11-m

onth

hol

ding

-per

iod

retu

rnThe January Barometer

Figure 1. 11-month compounded excess returns for years when the January return was positivefrom 1940 to 2008

44 positive Januarys39 positive 11-month returnsAverage 11-month returns =11.71%

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-0.600000000000001

-0.400000000000001

-0.200000000000001

-5.55111512312578E-16

0.199999999999999

0.399999999999999

0.6

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11-m

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The January BarometerFigure 2. 11-month compounded excess returns for years when the January return was negative

from 1940 to 2008

25 negative January years15 negative 11-month returnsAverage 11-month returns =-3.65%

From Streetlore to Market Regularity

For the 24 years from 1950 through 1973 (Hirsch Period)15 positive Januarys:

Next11-month return = 21.93%9 negative Januarys:

Next11-month return = -2.89%

For the 35 years from 1974 through 200823 positive Januarys:

Next11-month return = 18.07%12 negative Januarys:

Next11-month return = -0.13%

Using the Barometer: Investment Strategy

Long-only

Long/short

Long/t-bill

T-bill-only

January-plus-t-bill

A purely passive strategy of being long the market all the time

A strategy of being long the market over the 11 months following positive January and being short the market over the 11 month following negative January (coupled with being long the market during all January)

A strategy of being long the market over the 11 months following positive January and being in t-bills over the 11 month following negative January (coupled with being long the market during all January)

A strategy of investing in t-bills all the time

A strategy of being long the market during all Januarys and investing in t-bills during the other months of the year

Using the BarometerFigure 3. Wealth accumulation based on the January Barometer, 1857 - 2008

Using the Barometer Figure 4. Wealth accumulation based on the January Barometer, 1857 - 1939

Using the Barometer Figure 5. Wealth accumulation based on the January Barometer, 1940 - 1974

Using the Barometer Figure 6. Wealth accumulation based on the January Barometer, 1975 - 2008

Using the Barometer from 1857 to 2010

Figure 7. Wealth accumulation based on the January Barometer, 1857 – 2010, excluding 1940-1975 (Hirsch’s years)

Does the Barometer Apply to 2009-2011?

2009 January return = -7.75%; 11-month subsequent return = 42.67%

2010 January return = -3.71% 11-month subsequent return = 22.61%

2011 January return = 3.19% 8-month subsequent return = -12.18%

Does the Barometer Apply to 2009-2011?

Figure 8. Wealth accumulation based on the January Barometer, 2009- 2011

Using the Barometer from 1857 to 2010

Figure 9. Wealth accumulation based on the January Barometer, 1857 - 2010

Using the Barometer from 1927 to 2010

Figure 10. Wealth accumulation based on the January Barometer, 1927 - 2010

Using the Barometer from 1974 to 2010

Figure 11. Wealth accumulation based on the January Barometer, 1974 - 2010