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Thursday, January 9, 2014

The January Indicator examined


By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — As goes January, so goes the year?
That’s the premise of the so-called “January Indicator,” which holds that the stock market’s direction in January foretells the market’s direction for the next 11 months. And if that premise is correct, the stock market needs to do a lot better than it has so far, since it has turned in a net decline over the first four sessions of 2014.

But does the month of January have special forecasting ability? That is the question I was asked earlier this week in the wake of an earlier column in which I threw cold water on the related notions that the full year’s direction can be predicted by the market’s behavior on the first trading day of the year or over the first five sessions of January.

My answer: While the statistical foundation for the January Indicator is stronger than it is for the indicators based on those related indicators, it is still pretty weak.

Let’s start by reviewing the data for the Dow Jones Industrial Average DJIA -0.41%   since it was created in the late 1800s. The differences shown in the table below are significant at the 95% confidence level that statisticians often rely on when determining whether a pattern is significant.

% of time rest of year is up
January is an “up” month 74%
January is a “down” month 52%
Average of all years 66%

But even though these differences are statistically significant, it’s not clear that they help you very much in changing your investment strategy. That’s because the market is still up 52% of the time even following Januarys in which the market has declined.

Take what happened from 2008 through 2010. The market declined in each of those year’s Januarys. But only in 2008 did that decline presage a decline for the rest of the year. A follower of the January Indicator in 2009 and 2010 would have missed out on two years of double-digit gains if one were to have used the occasion of a “down” January to get out of the market.

Hulbert: Playing the Early January Odds

The Dow fell on the first day of the year. And it’s been down through the first three. To some, these are worrying harbingers for the year. Mark Hulbert says you might as well flip a coin. Photo: Getty Images.

Similarly, you get little help from the data when January is an “up” month. In such cases, to be sure, the market rises 74% of the time from February through December. But those odds aren’t all that much higher than what your probabilities of success would be — 66%, in fact — if you ignored the January Indicator and simply bet every year that the market would rise.

This discussion focuses our attention on the distinction between statistical significance on the one hand, and investment significance on the other. You can have the former without the latter, and the January Indicator may be a perfect example.

My bottom line: Focus your attention on the tried-and-true indicators you would be paying attention to any other time of year. There’s no reason to downplay their significance just because of what happens in January.

Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980. Follow him on Twitter @MktwHulbert.

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