The January Barometer — A Broken Instrument or Valuable Tool?
Author’s Note: This article was updated on December 24th, 2019. This week, I’m bringing back an article I wrote last year about one bullish indicator that could send stocks soaring in 2020.
Our house is overflowing with excitement today.
It’s Christmas Eve, and our two kids are going stir crazy thinking about what gifts they’ll open tomorrow.
The holiday season is an exciting time for my family. It also signals that a new year is upon us.
In just a week’s time, we’ll enter a new decade.
Funny how time flies.
The Winning Investor Daily team has been sending you our outlooks for the market as we approach 2020.
And today, I want to tell you more about a prediction I made at the beginning of 2019.
Back then, I wrote about one stock market phenomenon investors love to watch — the January Barometer. It’s a seasonal trend that tells us what to expect from the stock market for the rest of the year.
I recently wrote a new article all about this trend and two more seasonal trends that happen around the same time. When all three align, they have a 90% win rate in predicting a bullish rally for stocks.
It’s a highly profitable trifecta. And the stock market could see a huge rally next year if all three trends hit. You can read more about this trifecta right here.
Now, the article I’m sending you today delves much deeper into the details of one key component in this trifecta.
Since this article went live near the end of January 2019, the stock market has shot up.
When I wrote it, many who studied the January Barometer wondered if it was broken. It had been wrong two of the past three years.
They were looking at the most recent data and assuming this underperformance was becoming the norm for the January Barometer.
But I stuck with the trend. And as I explain in the article below, the barometer has a long history that we simply can’t ignore.
It came through for us in 2019. And it will be a key trend I watch in 2020 to see what guidance it gives us for the rest of the year.
In the article I below, I wrote about one small-cap ETF to help you play this seasonal trend.
While small-cap stocks didn’t outperform the market in 2019, the new year gives them an opportunity to catch up. And I still believe this ETF is a great one to trade in 2020 based on this seasonal trend.
Keep reading to learn more about the January Barometer and why it remains a very important tool to help us predict the coming year.
And if you’re interested in learning about more investment opportunities in the new year, you should check out the latest installment of my series, Bank It or Tank It. You can find all of the latest episodes over at my YouTube channel.
Until next time, I wish you all a Merry Christmas and Happy Holidays!
“As January goes, so does the year.” It’s the catchy saying to remember the January Barometer.
Its insight is simple. The direction that January takes predicts how the S&P 500 Index will do throughout the rest of the year.
But it is not always an accurate prediction. Two of the last three years, the barometer was wrong.
Last year was off to a historic start.
The S&P 500 surged over 5% in the first month of 2018, just before it plunged in February.
That was the barometer’s latest failed prediction. The year went on to finish at a 6.6% loss.
In 2016, it anticipated a down year. January kicked it off with a 5% decline.
By the end of the year, however, the S&P 500 was up nearly 10%.
This made many analysts skeptical when reading the barometer. They view it as broken.
Yale Hirsch was the first to notice the January Barometer back in 1972.
And the last in-depth academic study on the anomaly was 15 years ago.
So, is it a broken instrument?
Or is there still predictive value in the first month of the year?
I don’t want to ignore the performance in January … and what it means for 2019.
The Barometer Brings a Positive Prediction
It looks like another positive January will be in the books come the first day of February.
The January Barometer tells us to expect the rest of the year to remain in positive territory. And I’m sticking with it.
Since 1938, the barometer has had a track record of predicting the direction of the stock market with greater than 70% accuracy.
It tells us there’s a 70% chance stocks will be higher at the end of the year.
To understand why this barometer is still a powerful tool to predict the stock market, we have to look at why it became relevant to begin with — politics.
Barometer Accuracy Through the Ages
Congress adopted what’s called the lame duck amendment in 1935.
It shortened the period between the election and inauguration of presidents, vice presidents and Congress members.
It moved the beginning of the term for the president and vice president from March 4 to January 20. And it moved the start date for members of Congress from March 4 to January 4.
As a result, investors were bombarded with both a new Congress and a presidential State of the Union address in January.
Wall Street’s reaction to this influx of news set the tone for the year.
There are still a few days left before the end of the month, so I want to highlight what to expect if the returns are negative for the month.
Since the 1950s, every time January finishes lower on the S&P 500 Index, it precedes either a new or extended bear market, a flat market or at least a 10% correction — without fail.
This is more than enough to highlight the importance of January.
Despite the recent stumbles for its predictions, I still view the January Barometer as the definitive guide on how the year is headed.
With a better than 70% chance of the broad markets rallying in 2019, it’s a great time to be invested.
If you are wondering where to park your capital and benefit from the ensuing rally, take a look at small-cap stocks.
The SPDR S&P 600 Small Cap ETF (NYSE: SLY) is a great place to go.
Small-cap stocks, those with a market cap between $300 million to $2 billion, tend to be more volatile than larger stocks. But they also have a history of outperforming during rallies.
This exchange-traded fund will help you outperform while 2019 makes a comeback.
Chad Shoop, CMT
Editor, Automatic Profits Alert
This article was published on January 29th, 2019 updated on December 24th, 2019.