The January Barometer - S&P 500 Index

Chart of the Week for February 3-9, 2006

There is a Wall Street adage, “as goes January, so goes the year,” that is known as the January Barometer. The theory behind it is that the direction of markets in January is a predictor for what’s to come in the following months. For instance, if the market’s up in January, the year will be up and vice versa.

The chart above shows the January and yearly performance for the S&P 500 since 1990. The direction of market activity for the year has mirrored what happened that January in 12 of the past 16 years; years where this didn’t hold true are indicated with arrows. According to the Stock Trader’s Almanac, if we go back further to 1950, this relationship has held true in 44 of the past 56 years.

Despite the data, some analysts feel that studying January to predict the year is not helpful or is just part of a psychological effect and statisticians argue that there is insufficient data to back the theory. They are more likely to support the benefits of fundamental research. It’s an interesting set of numbers to see; nevertheless, investors should not rely on the January barometer to make their investment decisions. Earlier this week, the S&P 500 closed January 31st up 2.6% for the month. But what this means for the year 2006 remains to be seen—especially since the relationship hasn’t held true in three of the past five years.

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