Bankable January Barometer May be Back

The so-called January Barometer, which theorizes that the change in the first month of the calendar foreshadows the return for the rest of the year, has been off its game lately. After two down Januarys in 2009 and 2010, the market eventually rebounded to strong gains for those years.

These are rare misses for the much-maligned indicator. Maybe it’s the simplicity of it. Maybe it’s the fear that the retailing public may catch on and forego the services of a financial advisor the next 11 months. But most investors and traders are hesitant to call this indicator, which sports an 88 percent accuracy ratio, anything but voodoo.

Not so with Jeffrey Hirsch, whose father Yale Hirsch popularized the theory in the Stock Trader’s Almanac back in the ’70s. The younger Hirsch, who now publishes the almanac and web site known for its seasonal patterns, makes a good argument today on why last month’s gain will lead to higher returns in particular for the rest of 2011.

"Sure the ‘January Barometer’ is partly based on the fact you get beginning year forecasts from Wall Street strategists, individuals and companies, but most importantly you get the agendas from White House and Congress," said Hirsch.

Clearly President Obama, through his actions (extending the Bush tax cuts and enacting a payroll tax cut) and words (emphasis on growth and tax reform in the State of the Union) has made it clear that the tone in Washington will be more pro-business throughout the year.

These moves are just the kind the elder Hirsch had in mind when he was researching why the ‘January Barometer’ could work and came across the passage of the ‘Lame Duck’ amendment to the Constitution in 1933, which moved up when newly elected Senators and Representatives took office.

"Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November," states an explanation of the theory on Stocktradersalmanac.com. "Inauguration Day was also moved up from March 4 to January 20. As a result several events have been squeezed into January, which affect our economy and our stock market and quite possibly those of many nations of the world."

Hirsch gets to the 88.5 percent accuracy ratio by looking at the S&P 500 since 1950 and calling years in which the index is up or down less than 5 percent a wash. Even when you include those "flat" years, the S&P 500 closes the year in the opposite direction of January only a third of the time.

Another research firm, Bespoke Investment Group, backed up the merits of the barometer, finding that the change from February to December following positive Januarys averaged 7.7 percent over the last 50 years.

Critics of the theory point to how much you would have lost during those false positive years or that the barometer has only worked because the market has tended to go up the last 50 years. They say that may not be the case going forward in this higher interest rate, more dangerous world. Still, it’s tough to argue with the results.

"Two large drivers of the stock market are emotion and herd behavior," said Jim Iuorio of TJM Institutional Services. "If price performance in January is positive, it seems reasonable that it could create positive emotion for several months in the future by the time trend followers believe the race is on. Secondly, I mistrust those who are so smart, that they can’t be bothered with ‘dumb’ indicators."

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Ref: http://www.cnbc.com/id/41374136

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.