New year, old strategies; Why the January barometer still works

Thanks to more than 50 years of repetition by the Stock Trader’s Almanac, most investors have become well versed in the lore of the January Barometer. While some pros bristle at the notion of such agnostic market strategy, Sam Stovall, chief equity strategist, S&P Capital IQ isn’t one of them.

“Usually if the market is down in January you end up with a ho hum year,” Stovall says in the attached video. “But whenever it’s been up, the batting average - not only the frequency (of gains) but the magnitude of advance - has been stellar.”

Officially, the Almanac says every down January since 1950 has been correctly called by its Barometer and has a long-term batting average of almost 80%.

In some instances a month seems like too long to wait. In those cases it’s possible to make a call after only five days, thanks to a predictive power that’s been almost 90% accurate over the years.

More broadly speaking, Stovall has his own reason for thinking fresh new highs are headed our way in 2014.

“You also look to history which says great years tend to be followed by good years,” his research has found.  “We end up seeing an average increase of 10% in the year following gains of 20% or more 80% of the time.”

If that’s not enough to keep you in the game, Stovall adds that 2013 was only the 6th time since 1929 that stocks finished the year at their annual high, a rarity that he says has historically preceded price gains in subsequent years by an average of 8.5%.

If you still need more surety, Stovall has found another indicator that has, so far, proven to be foolproof. Specifically, by waiting to see if both January and February deliver positive returns, he says investors could potentially capture a perfect accuracy

“It’s happened 27 times since World War II,” Stovall says, noting that 2013 was the most recent year the up in January AND February phenomenon happened. When it does, he says the average total return is 25% with a 100% batting average.

“If the market does not go down in February, which it historically does, then investors think there are more good times ahead.”