Wall Street is full of old chestnuts of investing wisdom. I don't put a lot of stock and store in most of them, but the January Barometer, devised by Yale Hirsch of the Stock Traders' Almanac in 1972, is one of those chestnuts that's had a strong record.
"As goes January, so goes the year" has been accurate 45 of the past 63 years, going back to 1950, according to the Stock Traders' Almanac.
That is an impressive 73 percent accuracy record.
And it's even better during the 11 times the S&P 500 has been up more than five percent in January...up all 11 times, with 10 of the 11 up double digits.
Wow. That's pretty amazing.
But it's not perfect. Two quibbles:
First, it's not always good at telling you what is going to happen between February and December. All it says is, if January is up, the year is usually up. If January is down, the year is usually down.
But that doesn't mean that February through December will be up.
For example, in 1987 the S&P 500 was up 13.2 percent in January, but ended up only two percent for the year. OK, that was the year of the October Crash.
But in 1960, the S&P 500 was down 7.1 percent in January, and ended the year down only three percent. The market moved up from the end of January.
And in 1990, the S&P 500 was down 6.9 percent in January, but ended the year down 6.6 percent. So essentially the market went nowhere after January.
Second, it hasn't been quite as accurate recently as in the past. For example, it was only accurate six of the last 12 years.
A better "old chestnut" is the Best Six Months Indicator...buy and hold the S&P 500 from November through April, then get out. From 1950 through 2011, an investment of $10,000 would have yielded a total gain of $1,878,516 in that time period.
Had you invested the same $10,000 from May to October, you would have experienced a LOSS of $6,724.
Wow. A GAIN of $1.87 million, versus a LOSS of $6,724.
Had you just BOUGHT AND HELD that $10,000 from 1950 through the end of 2011, you would have had a gain of $600,206.
Now THAT is a winning trade.