Anyone hoping to capitalize upon the January Barometer is probably feeling a bullish twinge right now. According to the strategy, as goes January so goes the rest of the year – and with stocks off to a good start, based on Wednesday's rally, 2013 is looking like an up year so far.
Okay, one day does not make the month. But the bigger issue here is whether the January Barometer, like other statistics-driven market strategies, is really worth anything anyway. The short answer is No.
Mark Hulbert at MarketWatch has crunched some long-term numbers for the Dow Jones industrial average, going back to the late 1800s. He found that when the Dow rises in January, the rest of the year sees gains 67 per cent of the time.
That might sound appealing – the strategy has a two-thirds chance of success – but it comes with a couple of big caveats. First off, the 67 per cent chance of a market gain is up only 12 percentage points from when the Dow falls in January. In other words, the Dow has a 55 per cent chance of rising even when the index retreats in January, which suggests that the barometer isn't especially helpful.
And second, the barometer has huge outliers – in that a rise in January can, and has, been followed by a disastrous year. After rising in January 1931, the Dow subsequently fell 53.5 per cent by the end of that year.
That said, January does hold some bullish properties. Overall, the Dow has risen 63 per cent of the time in January, according to Mr. Hulbert. That compares to a gain 57 per cent of the time for the rest of the year.
But is that worth betting on? Probably not – although you won't get a definitive answer for another 12 months.
At least this January is being accompanied by an interesting contrarian indicator: Wall Street strategists remain a bearish bunch, and that implies stock market gains ahead, according to Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America.
She calls it the "sell side indicator": Wall Street strategists are currently recommending a 47 per cent allocation to stocks – up slightly since July but still well below the historical average of 60 to 65 per cent.
"Given the contrarian nature of this indicator, we remain encouraged by Wall Street's ongoing lack of optimism," Ms. Subramanian said in a note. She believes the indicator, on its own, implies a 12-month gain of 26 per cent for the S&P 500, or 28 per cent, when you factor in dividends.