January Barometer Update

This will be the third year in a row I’m writing about the January indicator and I plan to keep harping on it until it dies, which is probably never. You see, despite a thorough debunking, even supposedly sophisticated sources keep this bit of financial astrology in the news. Take for example a 2/1 piece on CNBC.com from the executive producer of Fast Money. Quoting, with emphasis by me (as usual):

After Two Misses, Bankable ‘January Barometer’ May be Back

The so-called January Barometer, which theorizes that the change in the first month of the calendar foreshadows the return for the rest of the year, has been off its game lately. After two down Januarys in 2009 and 2010, the market eventually rebounded to strong gains for those years.

These are rare misses for the much-maligned indicator.

 

Yes, that’s right. The indicator has failed miserably two years in a row. In fact, it has failed in 3 of the past 6 years (2005 being the other), which is worse than its long term average. A quick perusal of the data also shows it failing in 5 of past 10 years too.

In case you forgot, the reason this indicator appears so reliable is that the market is up about 75% of the calendar years on record, so being right 70% of the time doesn’t take much predictive power. (It fails after down January’s 65% of the time!) A fuller statistical explanation can be found in our original post. In addition, there just isn’t any plausibility for it to work.

Of course, that won’t stop people from writing about it. Anyone want to bet on coin flips?

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