Check the closing price for the Dow Jones Industrials Average on Monday, January 31^st.  A close above 12,217.56 would be a good thing and close above 12,675.75 would be even better.  Why are these values significant?  A close above the first value would trigger a buy signal from the venerable January Barometer (more in a moment).  And a close above the second value would mean a gain for the Dow during the last five trading days of January and would trigger the strongest possible buy signal from my own JayNewary Barometer.   

The January Barometer – the theory that states that “as January goes (for the stock market), so goes the year” – was first popularized by Yale Hirsch back in the early 1970’s.  Much analysis has been done since then and much has been written on the topic.  In fact, in my own book – Seasonal Stock Market Trends - I devoted an entire chapter (oddly enough titled “The Month of January”) to the implications for stock prices for the rest of the year based on stock market behavior during – you guessed it - the month of January.   This week, let’s take a quick review.

The JayNewary Barometer

I developed a simple model that measured the “strength” of the stock market’s performance during key periods within the month of January.  I refer to this model as The JayNewary Barometer (my name is Jay, the model was new, it was late, and so on), or JB for short.  Anyway, there are three key periods to measure:

-The First Five Trading Days of January: If the Dow Jones Industrial Average shows a net gain over the first five days of January, the model gets one point.

-The Last Five Trading Days of January: If the Dow Jones Industrial Average shows a net gain over the last five days of January, the model gets one point.

-The Month of January as a Whole – If the Dow Jones Industrial Average shows a net gain between December 31^st of last year and January 31^st of this year, the model gets one point.

The JayNewary Barometer is calculated at the close on the last trading day of January and can show a reading of 0, +1, +2 or +3.  The theory is that higher JB readings suggest a more bullish outlook for the stock market between January 31^st and the end of the year.  Does it really make any difference?  Let’s take a look.

The “Ground Rules”

For the following tests:

-We measure the performance of the Dow Jones Industrials Average between January 31^st of each year and the end of that same year eleven months later, depending on the reading of the JayNewary Barometer. 

-The test period is 12/31/1937 through today. 

 -The performance of the stock market during the month of January is ignored completely and no interest is assumed to be earned while out of the stock market.

JayNewary Barometer Readings and Subsequent Dow Performance

Figure 1 displays the cumulative gain achieved by holding the Dow Jones Industrials Average only between the end of January and the end of December for each given possible JayNewary Barometer reading (0, 1, 2 or 3).  

Figure 1 – Cumulative Dow % Gain achieved by buying and holding Dow Jones Industrials Average Jan. 31st through Dec. 31st after a given JayNewary Barometer reading (Dec. 1937-Dec. 2011)

As you can see, historically the better the reading for the JayNewary Barometer, the better the subsequent stock market performance.  Interestingly, the stock market performed better during the +3 years than during all other years combined.

Unfavorable versus Favorable Periods

Let’s go another step and compare the stock market’s performance during all years that register a JB reading of 0 or +1, to the performance during all years registering a JB reading of +2 or +3.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials between January and December only during those years that witnessed an “unfavorable” JB reading of 0 or +1.

Figure 2 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of 0 or +1 (Dec 1937 - Dec 2011)

Despite a strong “0” year in 2009 and a strong “+1” year in 2010, if an investor had been in the market only during all 0 and +1 years, an initial $1,000 investment in 1937 would now be worth only $1,563 dollars.

Figure 3 displays the growth of $1,000 invested in the Dow Industrials between January and December only during those years that witnessed a “favorable” JB reading of +2 or +3.

Figure 3 – Growth of $1,000 invested in Dow Jones Industrials Average following JayNewary Barometer readings of +2 or +3 (Dec 1937 - Dec 2011)

If an investor had been in the market only during these periods, an initial $1,000 invested would now be worth $38,917, or + 3,792% (remember this assumes being out of the market during the month of January and that no interest was earned while out of the market).

So to put this as succinctly as possible, the raw returns since 1937:

-Following JayNewary Barometer Readings of 0 or +1 = +56.3%

-Following JayNewary Barometer Readings of 2 or +3 = +3,792%

The Election Year Factor

Let’s go one additional step and examine the performance of the JayNewary Barometer only during presidential election years.  In Figure 4 you can see that on ten occasions the JayNewary Barometer has registered a gain of +2 or +3.  Following each such reading the Dow Jones Industrials Average gained ground between the end of January and the end of December. 

Figure 4 – Performance of JayNewary Barometer during Presidential Election Years (end of January through end of December)

In sum:

-If JB = 0 or JB = +1: February through December Dow up 4 times, down 4 times; Average performance = (-2.9%)

-If JB = +2 or JB = +3: February through December Dow up 10 times, down 0 times; Average performance = +9.2%

Summary

As this is written, the Dow already registered a gain during the first five trading days of January 2012 and is up roughly 500 points for the month as a whole.  So barring a massive selloff between now and the end of the month (and more specifically a Dow close below 12,217.56), we will register a JayNewary Barometer reading of at least +2.  If the Dow closes above 12,675.75 we will register an even more favorable reading of +3. 

The Dow is 10 for 10 when it comes to advancing post-January during presidential election years when the Jaynewary Barometer registers a reading of +2 or more.

Here’s hoping history will repeat itself.

Jay Kaeppel

Staff Writer and Author of “Seasonal Stock Market Trends”

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