January Indicators in Conflict

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Late last year, I contributed an article about the various year-end strategies, like the January Effect, and January indicators, like the January Barometer and Early Warning System. Now that January is over, let's review the last two that have some predictive powers for 2010.

The January Barometer was created by Yale Hirsch in 1972 in his annual book, Stock Traders Almanac, and essentially says that as goes January, so goes the whole year. According to Yale (and now his son Jeff), there have only been 6 major errors since 1950 with 2009 being one of them. January was down last year. Besides those 6, there have been a number of +4% to -4% years that the Hirsch's conveniently do not include in the accuracy calculations.

Detractors often point to these +4% to -4% years as well as the fact the research includes the January performance in its full year calculations when investors can't take advantage of the indicators until after January ends. A more robust system would use January's data but start the performance clock on February 1 for 11 months.

But overall, the January Barometer has done a decent job at predicting the year. And after last year's miss, the odds favor it being correct this year, (January was down -3.70%) which falls in the line with my own forecast for a best case scenario of very low single digit returns.

The other Hirsch indicator in January focuses on the first five days, called the Early Warning System. As you might guess, as goes the first five days of January, so goes the rest of the year. This indicator tends to work much better in up years than down ones with only a handful of full fledged misses since 1950. It correctly called 2009 and is also predicting an up year in 2010, which conflicts with the January Barometer.

Taking this one step further, there have been 17 years where the two indicators did not agree. The January Barometer was correct 9, Early Warning 6 and two flat years. That's not the overwhelming answer I was hoping for, but it is what it is. These indicators are also not something I would base my portfolio decisions on, but they are, nonetheless, interesting to keep an eye on.

Please feel free to email me with any questions or comments at Paul@investfortomorrow.com

Until next time…