January Barometer

I am currently reading the much acclaimed “Stock Trader’s Almanac 2015” and the first major seasonal indicator that comes up for discussion is the January Barometer. Designed by Yale Hirsch in 1972, the January Barometer states that as S&P 500 goes in January so goes the year. The Indicator has been successful 89.1% of the time since 1950.

In India, we are not fortunate to have such large data sets and hence I have had to make do with the Sensex data that I have. Starting from 1982 till 2014, the Sensex has had a record that is pretty close to a coin toss.

In those 33 instances, markets have followed January only 17 times while going against what was seen in January 16 times. In that sense, there is nothing much to take from it. But with January 2015 being +ve, let us see what it can bring in the year ahead.

Of the 16 times January has been positive, the year has ended in positive territory 12 times. That is a nice 70% hit rate. The average gain for the year in such years has been 31.81%.

In the 4 instances where January was +ve and yet the year closed on a negative note, the average loss in those years came to 13.69%

On the other hand, what if January was Negative? We have had 17 such instances and of those, January affect was seen in just 5 years (January negative and Year ending in Negative).

The average gain for the year when January was negative (12 instances) came to a astounding 36.86% whereas the average loss of the year when January was negative (5 instances) came to 23% (a reason for the high loss being 2008 when markets fell 52%. Exclude that and the average drops to 15%).

Since January 2015 ended with gains, right now the higher probability is of markets to close in +ve territory. Then again, this is neither a wholesome trading strategy nor do we have a very high confidence level.