January Barometer – What is it, definition and concept

Therefore, it is an indicator of the possible evolution of the market, if it rises in January, this belief implies that there will be a positive result for the rest of the year. It would not be every month, but in the global set of the remaining 11 months.

This prediction, as we will see, has been fulfilled in a certain period and in certain countries. But over time, flaws have been discovered that make it more of an act of faith than a reliable indicator.

The January Barometer. Origin and operation

Yale Horsch, in 1972, wrote a novel entitled “Stock Trader’s Almanac.” In it he mentioned this phenomenon that continues to mark the investment strategies of many in the 21st century. In addition, it seems to be true, above all, in the US stock market S&P 500.

On the other hand, it is a forward-looking indicator. That is, it seeks to directly predict the future without taking into account the past. What it does is calculate an index of annual returns based on what happened in the month of January of that year.

The January effect and market timming

First of all, we must not confuse the January Barometer with the January effect. The latter is an increase in share prices that usually occurs in that month and is seasonal. It appears to be the counterpoint to December’s sell-off.

On the other hand, this method is closely related to the concept of market timing. In a simple way, it is the movement made by investors deciding through predictive methods. Although we will see that in this case it does not seem to be too accurate.

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Historical January Barometer Forecast Data

In the first place, from the middle of the 20th century to 1984 it seems that the correlation was high. Whether the market was up in January or down, there seemed to be a similar trend for the rest of the year. The predictive ability was between 70% and 90%.

As of this date, it fell to 50%, therefore, it was not really useful to predict. However, there are many investors who continue to use the January Barometer as an aid to their investment decisions. Therefore, it is best to always use several techniques.

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