The January barometer is a well-known market indicator. It tells us simply that if stocks rise in January, we should expect an up year. This year, the indicator was bullish.
CFRA, the world’s largest provider of independent equity research for institutional investors, recently published a report showing that if both January and February are up, we tend to see a very strong stock market for the next 10 months.
Ninety-three percent of the years where both months were up ended higher, and investors enjoyed an average 10-month gain of 24% in those years. This indicator provides a buy signal in about one-third of the years since 1945, and, barring a market crash, 2017 is on track to provide a buy signal as well.
This is an amazing track record, but I don’t think the report is complete. There is no data about the years when at least one of the months was down.
With some backtesting, I was able to find that the average return from March through December in years when at least one of the months was down was just 4.7%, and only 60% of those years were up years.
These charts make it easy to see that we should expect gains this year. But I had one more question: Are these results just a fluke, or are they statistically significant? A little more analysis determined that these results are statistically significant, with only a 0.005% probability that this relationship is due to chance.
The evidence is mounting that this could be a big year for the stock market. If there is a dip, it will be important to consider buying. But in the very best bull markets, we don’t often see large pullbacks.
Michael Carr, CMT