More than 40 years since its incarnation, the so-called “January Barometer”—a theory that the direction stocks take in January predicts how their entire year will play out—is still going strong in some camps. But it’s not without its vocal detractors.
In a recent Wall Street Journal article entitled “Sorry, the ‘January Barometer’ Is a Market Myth,” Fuqua School of Business Finance Professor Cambell Harvey weighs in—in opposition.
Citing the Stock Trader’s Almanac, the Journal article credits the January Barometer, also sometimes called the January Indicator, as being devised by market guru Yale Hirsch in 1972. And its proponents, including Hirsch’s son, Jeffrey, who serves as editor of the Almanac Investor newsletter, claim an 86.4 percent accuracy rate for the Barometer since 1950.
Not so fast, argues the Journal article. To arrive at this accuracy rate, the younger Mr. Hirsch ignores years when the indicator’s failures were minor—as in “flat years” when the market moved less than 5 percent in the opposite direction of forecasts—while also including calculations that support the theory’s success rate taken from years before the theory was espoused in 1972.
“Both of these statistical no-no’s are symptoms of an all-too-common practice known as data mining—slicing and dicing the data until they produce the desired conclusion,” reads the Journal article.
Fuqua Professor Harvey Campbell takes issue with the data mining—noting that it is not unique to the January Barometer but in fact extends to much of academic finance research. Serving as president of the American Finance Association, Campbell addressed the group at a recent event in Chicago saying, “Many of the supposed patterns on which some market timers and traders base their strategies would be found to be no more than statistical flukes if their track records were properly adjusted for the data mining involved in their discoveries.”
So—what’s an individual investor to do? The Journal article urges buying and holding a diversified group of quality stocks—paying little mind to whether the stock market is up or down this month.
