Wednesday, February 4, 2009

As goes January so goes the year – Testing the January Barometer

There are many sayings on Wall Street including sell in may and go away, buy and hold, buy low sell high. While it is hard to argue with the timeless truth behind some of investing folklore, investors should always test various strategies in order to determine if a particular technique works for them.

One investing philosophy that I will try to test today is the so called January barometer, which foretells that as the market performs in January, so will the stock market perform over the next 11 months.

Using Dow Jones Industrials Monthly data from 1929 to 2008, I found that this telling is pretty accurate with an overall 67.50% success rate. That means there is only a 32.50% probability that the trend in January reverses and goes in the opposite direction in the next 11 months.
The January Barometer is most accurate with a 75.47% probability whenever we get a bullish signal. The January Barometer is least accurate with a 51.85% probability when the first month of the year closes in the red.

Markets have not been kind to investors in 2009, as Dow Jones industrials average fell 8.8% in the first month of the year.

As a long term dividend investor however, I don’t subscribe to following timing theories which have been derived after searching through reams of data, in order to find what had worked in the past, without asking the question why is this indicator actually working. I subscribe to the buy and hold approach where one buys a basket of quality dividend names, reinvests the dividends and hopes for the best. If investors spent the month of January in cash since 1929 in order to determine whether they should be long or short the markets, would have under performed the markets. $100 invested in stocks on December 31 of the preceding year and sold on the last trading day of January would have appreciated to 1204 by 1/31/2008.
Relevant Articles:

- Dow 370,000
- My Dividend Growth Plan
- When to sell your dividend stocks?
- The ultimate passive investment strategy

2 comments:

  1. I'm wondering what your analysis is for the other 11 months. Seems to me that we have a bull market most of the time anyways - but when we "correct" it's always a big drop. It's like walking up the slopped side of Everest - it's nice and gradual but if you go too far...

    ReplyDelete
  2. The January barometer says that the market wll go lower from here.

    I don't know where the market will be. I know that if I keep reinvesting my dividends, 2 decades from now will bring a nice source of income.

    ReplyDelete

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