The January Barometer basically says that as goes the S&P 500 in January, so goes the market for the year. “A down January means a down year” would seem to be the obvious reading for 2008. Credit Yale Hirsch, editor of the Stock Trader’s Almanac, for devising the January Barometer in 1972. According to the Hirsch research, January’s trend matches the trend for the year about nine times out of 10. If you toss out a few close calls, when the market was up or down less than 5 percent for the year, the January Barometer still works three out of four times, the Stock Trader’s Almanac reports. Since 1950, the S&P 500 has posted a gain for the year 91% of the time that the index experienced a positive January. For those "cautious" investors who desire an even larger sampling, since 1926, that percentage [a positive January foreshadowing a positive full year] falls to 80%, although that’s still a pretty telling predictor of future market activity.Strictly market lore like other purely coincident indicators, like winning football teams, magazine covers, and women's hemlines? Not so, according to peer-reviewed statistical research.
"...We systematically examine the predictive power of January returns over the period 1940–2003 and find that January returns have predictive power for market returns over the next 11 months of the year. The effect persists after controlling for macroeconomic/business cycle variables that have been shown to predict stock returns, the Presidential Cycle in returns, and investor sentiment, and it persists among both large and small capitalization stocks and among both value and growth stocks. In addition, we find that January has predictive power for two of the three premiums in the Fama–French [1993. Journal of Financial Economics 33, 3–50] three-factor model of asset pricing."
The Other January Effect, Journal of Financial Economics, Volume 82, Issue 2, November 2006, Pages 315-341
