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The January Barometer: Is It a Market Myth or Valid Predictor?

TORONTO, ON – 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, 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.

The January 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.”

So Whiteside 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 @ 6569.49.

During this time period the TSE/TSX gained 4763.41 points.

The formula 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 market?

Whiteside said 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.

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“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?

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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? 

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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 points.

In the years this method forecast that the market would close the year higher, and it closed lower, you would have lost an additional 2220.18 points.

The bottom 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.

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Whiteside’s 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 here., 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 families.  


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