It’s January, so that means more of the January indicator myth
Every January, without fail, the financial press haul out their stock articles about the January indicator*, update a few numbers and voila! another article done for the month. The WSJ ran a piece about this “bellwether indicator”. As expected, journalists got it wrong and only promoted the often quoted myth. If the WSJ can be lazy enough to post the same old tired article, I can take a few sentences to point out again why this particular bit of Wall St. lore is wrong.
Last May, we pointed out why this isn’t an indicator. In short, it only works in one direction. If January is up, the indicator seems to work. I say “seems” to work, because the market is up more often than not, which correlates nicely with up January’s. In addition to the math and logic in my original article, I’ll point out another reason: there is no plausibility as to why it should work.
There must be a mechanism by which the observed effect happens. If the effect is observed and isn’t just a spurious correlation, there must some mechanism by which it works. Yet after decades of citing this bellwether indicator, no one can explain how it works. I submit that is because it does not work and is nothing more than a inauthentic correlation.
Think about it: to work, investors must collectively buy in January because they determine the market will be higher later in the year. How would they know? Markets are not efficient: bubbles happen frequently; crisis happen suddenly; wars break out and market timing doesn’t work. So how would investors reliably know that the rest of the year is going to be up? For the indicator to have plausibility, investors must somehow collectively discount the future in January yet we know people can’t accurately or reliability predict the future. We wouldn’t see such wild price swings if everyone has such wonderfully accurate foresight. The whole premise is deeply flawed and illogical!
Alas, you will no doubt see the articles year after year just like Bigfoot, Loch Ness and other thoroughly debunked topics continue to circulate. Never underestimate the power of simple, quotable and wrong statistics. In fact, I only used 10% of my brain to write this.
*The “as the January goes…” indicator should not be confused with the “January effect”. The January effect is a different phenomenon which highlights the tendency of stocks, particularly small company stocks, to rise in January. Theories for this revolve around tax selling of stocks carried at a loss in December (for deductibility), followed by new money flowing into the market in January when bonuses, pension and 401K flows tend to get invested.
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