Stock Market Research
The January Barometer: Is It a Market Myth or Valid Predictor?
– Canadian markets were down this past January, but what
does that portend for the rest of the year? Stephen Whiteside,
president of market-analysis firm TheUpTrend.com, has looked
into the historical accuracy of the so-called January Barometer,
and he has discovered that is largely a myth that should
not be followed by Canadian investors.
Barometer is the prevailing theory that, if the stock market
is up (or down) in January, the rest of the year will follow
suit. “This theory is dragged out every year, dusted off,
and thrown out to the public as fact,” says Whiteside. He
continued, “Many people claim that the January Barometer
has a 90%+ track record of accurately forecasting the direction
of the market.”
wanted to know if this was indeed fact, or just another
market myth. Does the January Barometer really work in the
Canadian market? And if it does, are the gains significant
enough that Canadian Investors should pay attention to it
as a market predictor.
To answer these
questions, Whiteside examined the TSE/TSX prices from the
first day of trading in 1980, when the TSE opened @ 1806.08
to the last day of trading in 2002, when the TSX closed
time period the TSE/TSX gained 4763.41 points.
for the January Barometer is very simple: Take the opening
price of the first trading day of January, and the closing
price of the last trading day of January. If the last day
is higher than the first, then the January Barometer forecasts
that the year should be bullish and you should buy into
the market on the first trading day of February. If, on
the other hand, the last day of trading is lower, then you
should stay out of the market for that year.
So was the
January Barometer able to predict the direction of the Canadian
he found that over the 22-year period from 1980 to 2002,
the January Barometer accurately predicted the direction
of the Canadian market 68% of the time.
“On the surface,
that all sounds great”, said Whiteside. “But does being
able to predict the direction of the market, actually help
the average investor obtain better results?”
If you had
followed the January Barometer each year, and either bought
or stayed out of the market for the rest of the year based
on its guidance, how would you have fared?
For the 15
years where this method worked, you would have been up 5345.98
TSE/TSX points and would have missed losing 2225.65 points
on the years it correctly forecasted that the markets would
have been down.
But what happened
in the 7 years that this method was wrong?
In the years
this method forecast incorrectly that the market would close
the year lower, you would have missed out on gains of 2439.18
In the years
this method forecast that the market would close the year
higher, and it closed lower, you would have lost an additional
line is, by using this method over the 22-year period when
the market by itself gained 4763.41 TSE/TSX points; you
would have only gained 3125.80 TSE/TSX points or 34% less
than if you had used the simple buy-and-hold method.
conclusion: The January Barometer is just another market
myth that should not be used by investors to try to predict
the direction of the Canadian markets.
For more information
on this study visit, click
provides on-line Canadian Investors with daily trend analysis
on over 1,000 Canadian and US stocks, Income Trusts, iShares
and iUnits, as well as all of the major market indexes.
For Long Term investors, we also provide weekly analysis
on over 1200 Canadian Mutual Funds from 30 different fund