Measuring the Stock Market’s Future: The January Barometer

You’re going to hear a lot of different economists and pundits predicting the how the economy is going to turn out for the new year. One of the ways these “experts” make their predictions is by something called the January barometer.

The January barometer is a theory that basically compares the movement of the S P; 500 at the end of the month to where it was at the beginning of the month. If it is higher at the end of the month, then the theory is that the economy is expected to rise that year. If it is lower, then it is bad news for the economy.

You might think this is just voo-doo economics or something akin to the groundhog seeing his shadow, but think about this for a minute. The economy grows when people spend money. People usually are broke in January because they are paying off their Christmas purchases. So, if the economy is actually growing at the end of January, that is, if the stock market is up at that time, it does tend to follow that it is going to be a good year.

Some studies have shown the January Barometer to have better than a fifty percent accuracy rate but just using the last nine years the January barometer fell short in accuracy with a score of five to four. On the other hand, other studies, which go much farther back in time, show much greater accuracy

Don’t confuse the January Barometer with the January Effect. These two concepts are often used confused and they are quite different. The January Effect is the tendency for small cap stocks to do better than large cap stocks in January.

So should you use the January Barometer to help you make your decisions as to whether to buy or sell stocks? Frankly, I don’t know. Maybe you should get out the magic eight ball, give it a shake, and ask it what it thinks. Buying and selling stocks is a tricky business, and anything can happen. Whether the January Barometer will be correct in 2010 is anyone’s guess. The best that you can do is study the company’s financial statements and buy or sell based on informed decisions.