What is the barometer for January?

“January Barometer” refers to the idea that some traders have that the S&P 500 Index’s stock success in January can show how it will do for the rest of the year.

Some people who hold this view think that if the S&P 500 goes up between January 1 and January 31, things will go well for the rest of the year. In the same way, if the market does badly in January, it probably will do badly again after that.

How to Read the January Barometer

Yale Hirsch, who wrote the Stock Trader’s Almanac in 1972, came up with the idea for the January barometer. However, some traders still use it today.

Trade people may use this idea to guess when the market will go up or down. In other words, they might only put money into the market when the measure says it will go up and not at all when it says it will go down.

Supporters of this point of view will point to data that shows the January Barometer has only made 11 mistakes from 1950 to 2021, which means it is 84.5% accurate. But this effect might not be as natural as it seems. After all, the U.S. stock market made money every year for about 70% of the time from 1945 to 2021. So, the January Barometer might not be a unique event that can help people time the market better. Instead, it might just be a side effect of the general trend for U.S. stocks to rise slowly each year.

People who don’t believe in the January barometer idea will say that similar events haven’t always been seen outside the U.S., so it might just be a brief quirk of the U.S. stock market.

The January Barometer might be able to keep going on its own. If U.S. buyers respond to a good January by putting more money into stocks, prices might increase. If this is true, it might explain why the link between January and annual market gains is more vital in the U.S. than in other places where the January Barometer idea is not as well known.

An Example of the January Barometer in the Real World

The January barometer has had a range of readings over the last few years. In January 2022, the S&P 500 fell more than 5%, and by the end of the year, it had lost 20%. The S&P 500 fell 1.1% in January 2021 but rose just under 27% for the year. It was harder to tell what would happen in 2020 because the S&P 500 dropped 0.16% in January but rose 16% for the rest of the year. In 2019, the S&P 500 went up 7.87% in January and over 28% for the year.

How do I get to the Santa Claus Rally?

Yale Hirsch, who wrote the Stock Trader’s Almanac, came up with the idea of the rise of Santa Claus in 1972. It is similar to the January barometer. The Santa Claus rally is looking for a rally during a six-session stretch that starts with the first session after Christmas and ends early in the New Year.

What does a sentiment indicator do?

A sentiment predictor tells you how a group of people feel about a business or market. Investors and economists are always looking for signs showing what will happen in the markets or the economy in the coming months. Generally, the idea is that market behavior will often follow what people think. Others think that recent performance can show how a group of investors feels, so they expect the performance to continue.

What does seasonality mean?

Seasonality is the way that a market or business changes in regular ways over a year. Customers’ buying habits can change a lot at certain times of the year for businesses in some areas. For example, Christmas shopping is often a big reason why retail companies make more money over the year.

In Short

The January Barometer has been around for more than 50 years, showing that the idea behind it is vital. There will likely be a discussion in statistics for decades to come about whether the sign is an excellent way to predict how the S&P 500 Index will do. No matter what, the beginning of a new year always gives traders a chance to guess what might happen in the months to come, and it’s not unreasonable to think that signs like the January Barometer will continue to be at the center of that conversation.

Conclusion

• The January Barometer is a market theory that says returns in January can be used to guess returns for the rest of the year.
• Some traders like it, and the Stock Trader’s Almanac was the first to write about it.
• The January Barometer is primarily a U.S. thing related to the S&P 500 Index.