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Kaeppel's Corner: January Has Spoken, Now What?

By Jay Kaeppel, Optionetics.com | Tue February 5, 2013 9:26AM PT

 

The January Barometer – developed long ago by the legendary Yale Hirsch – has given a resoundingly bullish signal in 2013.  The first five trading days of the month period, the last five trading days of the month period and the month of January as a whole, all witnessed gains.

So if the January Barometer is an accurate guide the “Happy Days are Here Again”.  Which of course, raises the all important question – is it in fact an accurate guide?  Let’s take a closer look.

 

The January Barometer as a Standalone

As an admitted “numbers geek” I am acutely aware of the fact that in many cases, you can make the numbers look good or not so good depending on what you want to show.  For now, let’s simply consider the raw January Barometer.

Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average from the end of January through the end of December only during years when the Dow showed a gain in the month of January, since 1/31/1934.

Figure 1 – Investing in the Dow February through December when the January Barometer is bullish (1934-present)

For comparison sake, Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average from the end of January through the end of December only during years when the Dow DID NOT show a gain in the month of January, since 1/31/1934.

Figure 2 – Investing in the Dow February through December when the January Barometer is NOT bullish (1934-present)

As you can clearly see, a gain for the Dow in the month of January has been a much better sign for the remainder of the year than a down January.  That being said, as always, remember that just because the Dow is UP in January there is no guarantee that the market will rise the rest of the year and vice versa.

Still, an “up” January does suggest that we give the bullish case the benefit of the doubt. 

 

The Post-Election Year

Figure 3 displays the growth of $1,000 invested in the Dow only during each post-presidential election year since 1934.

Figure 3 – Investing in the Dow during Post-Election Years (1934-present)

For the record, overall, the post-election year has been the worst performing year of the four-year election cycle (comprised of post-election, mid-term election, pre-election and election years).  Still, if you look at Figure 3 long enough you come to realize that it is difficult to draw any conclusions about the likely direction for the market during any given post-election year.  To wit, for the record, since 1934 the post-election year has been up 9 times and down 10.

 

Combining January Barometer and Post-Election Year

Figure 4 displays the growth of $1,000 invested in the Dow:

Blue line: From January 31st through December 31st of Post-Election Years when the Dow was UP for the month of January

Red line: From January 31st through December 31st of Post-Election Years when the Dow was DOWN for the month of January

 

Figure 4 – Dow performance during Post-Election Years depending on whether January was UP (Blue line) or DOWN (red line) since 1934

As you can see by looking at the red line, the Dow has showed a February through December gain 8 out of 11 times during those post-election years when the Dow was up in the month of January.

 

One Last Step: Adding a Trend Indicator

A close look at the blue line in Figure 4 reveals that the Dow experiences some pretty nasty declines in the post-election years of 1937 and 2001, despite a bullish sign from the January Barometer.  So for post-election years (including for the remainder of 2013), it might make sense to keep an eye on where the Dow stands relative to its simple 200-day moving average.

Figure 5 displays the growth of $1,000 invested in the Dow:

Blue line: From January 31st through December 31st of Post-Election Years when the Dow was UP for the month of January AND the Dow is ABOVE its 200-day moving average.

Red line: From January 31st through December 31st of Post-Election Years when the Dow was UP for the month of January BUT the Dow is BELOW its 200-day moving average.

Figure 5 – Dow performance during Post-Election Years following an UP January when the Dow was ABOVE its 200-day moving average (Blue line) or BELOW its 200-day moving average (red line) since 1934

 

Summary

So the good news can be summed up as follows:

-The Dow has showed a strong historical tendency to advance between the end of January and the end of December following an UP month of January. 

-This as mostly held true even during the inconsistent historical performing post-election year

-Especially if the Dow is trading above its 200-day moving average.

-Historically during the post-election year when the January Barometer is bullish, the February-March period experiences a “lull” which is often followed by a strong “April-May” period.

All of this suggests that long-term investors should resist the urge to fret the news and should simply keep an eye on the Dow compared to its 200-day moving average.  As long as it holds above this key measure, “the trend is your friend.”

Figure 6 – Watch the Dow versus its 200-day moving average (Above=Good; Below=Bad)

Jay Kaeppel

Staff Writer and Trading Strategist

Optionetics.com ~ Your Options Education Site



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