According to the Stock Trader’s Almanac, the January barometer has a 90% accuracy ratio since 1950. The premise of the January Barometer is simple: As January goes, so goes the year.
The December 19 TF featured charts of the S&P’s performance in January 2007, 2008 and 2009, all of which were down months. However, over the past three years a new pattern has emerged. Year-end euphoria has culminated into sentiment extremes and January sell-offs.
- Therefore, the January barometer has proved correct only five times over the past decade, a 50% accuracy ratio.
As discussed over the past several weeks, sentiment extremes point towards a January correction and a down month. A down January, however, would contradict another high probability seasonality, the Presidential Election Year Cycle, for example. A pre-election year, such as 2011, sports the best historical performance of the four-year cycle. In fact, the last pre-election year loss was recorded in 1939 (Dow down 2.9%). The last significant pre-election year loss occurred in 1931, during the Great Depression.
The pre-election year performance pop is credited to each administration's efforts to pump up the economy (or at least the stock market) to finish strong and persuade voters to re-elect whoever is in office.
- However, this time around much money has been pumped into the economy before the pre-election year (bailouts, low interest rates, QE1 and QE2). There is a chance that this premature shot of liquidity alters the cycle and mortgaged the market’s otherwise rosy future.
Past performance has proven to be a unreliable indicator of future results!