The January barometer and other myths

Investing ColumnFebruary 25, 2014 

Is the "January Barometer" fact or myth? How about the "Super Bowl Barometer"? We tend to hear about both of these a lot this time of year. Should an investor make investment decisions based on what barometers are telling us? No. I think not. But, there is nothing wrong with having a little fun with them.

The "January Barometer" states that as the stock market goes in January so goes the year. This theory was developed by Yale Hirsch in 1972. The tracking goes back to 1950 and has registered only seven major errors since then. This leads to an impressive accuracy ratio of 88.5 percent. Impressive indeed!

Last year January was a very strong month and we ended the year with the S&P Stock Index up by 32 percent. The "January Barometer" worked quite well. At the end of this January our barometer was down 5.3 percent indicating this will not be a positive year for equities.

Is the "January Barometer" therefore a fact? No. It depends on the time frame one uses. Track

ing the stock market from 1897 gives us a different result. That result shows the "barometer" to be accurate about two thirds (67%) of the time. But the fact is the stock market tends to go up that same percentage each year regardless of what happens in January.

I do like numbers. With one barometer being measured over a 64 year period and the other over a 110 year period I go for the longer time frame. With that I declare the "January Barometer" more a myth than a fact.

The Super Bowl Barometer says that if an NFC team wins, the stock market likely will have a positive year. Over the last 47 Super Bowls this barometer has been correct 37 times. That's 78.7 percent of the time. The Seahawks, an NFC team, just won the Super Bowl. That should be good for the stock market this year. The time frame on this barometer is over just 47 years. Not nearly enough time, in my humble opinion at least, to be basing investment decisions. It is still more of a myth than a fact.

Seeing patterns when there are none comes from our evolutionary past. Our ancestors' stopping on the Serengeti plains when hearing the growl of a predator tended to be a smart idea because they may have often been followed by the predator itself. If no predator followed it was no big deal. But the pattern of growl followed by the actual predator was an effective pattern to believe in to stay alive. To this day we continue to see patterns almost everywhere.

Interwoven between these two myths is a real investment fact. That fact is the stock market goes up about two thirds of the time. That's 66.7 percent of the time. Not as impressive as our two barometers but, in my opinion at least, still a good percentage.

Stock market barometers such as these are a form of market timing if taken seriously. Trying to time the stock market successfully is the big myth -- one still being perpetrated by many of the advertisements we see on the financial stations.

It is time in the stock market not timing of the stock market that makes for a successful investor. Statistics vary but over any fifteen year time period if one had missed the ten best stock market days their return would be half that of the investor that stayed fully invested. Missing twenty of the best days would have provided a return of only a third of what the fully-invested investor experienced.

The "January Barometer" and the "Super Bowl Barometer" are fun things to talk about around the water cooler. Relying on them to make investment decisions is plain foolish.

Michael T. Doll, an Investment Advisor with the Longboat Key Financial Group, can be reached at 941-383-2300 ext 6 or Michaeltdoll@longboatkeyfinancial.com.

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