January Barometer Flashes Red Signal for Investors

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As goes January, so goes the year: that’s the basis of the January Barometer, devised by the Stock Trader’s Almanac.

The idea is that what we see from the S&P 500 (^GSPC) in the first month sets a tone for the rest of the year. Taking out the Januarys when the index barely budged, it has correctly predicted an up or down market for the full year better than 75 percent of the time since 1950.

If that correlation holds this year, 2015 could be a rough one for investors. The S&P fell 3.1 percent in January. “Almost every single down January up until last year was followed by a bear market, a 10 percent correction or a flat year,” according the Jeffrey Hirsch, editor of the almanac.

‘Not Everything Is So Rosy’

Hirsch says the drop this January indicates “that not everything is so rosy, but it does not mean we’re going down 20 percent from here.” This January has been especially volatile, as the Dow Jones Industrial Average (^DJI) swung up or down by 1 percent or more (about 170 points) 10 times in 20 days of trading, including Friday’s 251-point slide.

The market has been roiled by the plunge in crude oil prices, which sent energy company stocks tumbling, the slumping economies of Europe and Russia and disappointing earnings news from blue chip companies, such such as Caterpillar (CAT) and Microsoft (MSFT).

The S&P and the Dow both set dozens of record highs over 2014, as stocks entered the sixth year of the current bull market. “These markets don’t go up forever,” said Hirsch. “We see a little more upside, but I don’t think this market will go up for many more years.” He and other Wall Street pros have been saying that for some time. The market is due — some say overdue — for at least a correction, but the endurance of this bull market has been consistently underestimated.

Hirsch says that while the January Barometer, devised by his father Yale back in 1972, is a valuable indicator, it has been trumped in recent years by the Federal Reserve’s massive quantitative easing program, which pumped billions of dollars into the economy and provided support for the stock prices.

Many Predictors, Indicators, Barometers and Theories

There are hundreds of Wall Street indicators, barometers and theories — ranging from the silly Super Bowl Predictor to some wonky ones based on serious numbers-crunching. Hirsch believes the January Barometer should be taken seriously, “even though it does not live in a vacuum; it’s not perfect.”

Some analysts say the January Barometer is a pretty good indicator when the market is up for the month, but is unreliable when it’s down in January.

Hirsch sees more upside for the market in the first half of 2015, with the S&P rising to another all-time high of about 2,250 and the Dow to 19,000 by April or May, “but not much after that.”

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