It’s January – you know what that means

I was saving this post for the end of the month, but the tea leaf-reading, fortune-telling, divining rod, hocus-pocus is starting early this year, so I’ll post it today.

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You guessed it, it is prediction time! Along with the new year, the pundits will come out and make confident, bold predictions about the year to come. They’ll hardly ever revisit last year’s forecast and how wrong it was, but no matter, they will confidently predict this year’s path anyway. Of course, this annual exercise tends to hit the press in January and January is the month that supposedly predicts the stock market for the rest of the year. (Recaps of this topic here and here.) I’m going to pre-empt the February 1st or 2nd headlines right now.

For 2011, the January Barometer was wrong, again. January 2011 was an up month and the rest of the year was down, albeit slightly. That makes the miss three-in a row, 50% on the last decade and only 64% since 1926. No doubt pundits that will choose a time period with more favorable statistics which to cite as evidence (you get 69% by choosing just 1940 onward).

Let’s play a game, shall we? Please post in the comments links to any January Barometer articles you find, so we can chuckle at their ignorance of statistics and logic. I expect them to start appearing in early February.

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And here are the TWO instances of nonsense I’ve already seen:

In this article from CNBC.com, we learn that “Since 1945, a positive January in an election year has never missed in predicting a full-year gain for the Standard & Poor’s 500, going 8-for-8″. Wow, a whole 8 data points, conveniently ignoring pre-1945 data (why?) 8 data points is not statistically significant for, well, anything. But go ahead and peruse the article anyway, it’s laughable. It includes gems like “Whatever the S&P 500 doesn’t provide in absolute return this year, it will likely make up for in predictability”. What the heck does that even mean? I’m floored.

And then we have this little interview on the otherwise good ‘Breakout’ on Yahoo!Finance. At about 2:10 into the interview, the guest disclaims “even with a few errors”, the January Barometer is still “pretty good”. Uh huh.

Please use the comments to share other incidences of magical thinking.

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.

As January goes, so goes the year

That’s an old, old Wall Street adage. So old, in fact, that I couldn’t even track down its origins. What the maxim means is that the direction of January foretells the stock market’s direction for the rest of the year (February through December) that is. Financial journalists love to pull this one out every year, particularly since a little quick math is impressive. In the 82 full years since and including 1926, this metric has worked 70% of the time. Considering markets are either up or down, 70% is much better than the coin flip odds would suggest. Or is it?