We, we've heard a lot about the "January Barometer" this past week. That's the notion that if the stock market finishes positive for the month of January, it will finish positive for the year as a whole. We certainly had a strong January. But let's not get carried away, folks. It's really the stock market's version of a groundhog's shadow.
People, and media, love predictors. They have cute names (great for headlines), simplify complicated situations, and add tension to what can be a sometimes dry and lengthy process.
And such indicators can have an almost supernatural fascination, especially if a particular one has a fairly positive track record.
And this particular predictor has only been decidedly wrong seven times since 1950. This year people are even more excited about it. The S&P 500 gained over 5 percent for January. Super strong Januarys have coincided with super-strong yearly returns. Heck, 1954 had a strong January and finished with a gain of 45 percent. Yowzah.
But despite the track record, keep in mind, it's still an incidental predictor. There are others as well. The Hemline Indicator … the shorter the skirts the better the economy. An especially timely one for this weekend: The Super Bowl Indicator … if an NFC team wins, the market will finish the year up. There are others based on lipstick, snow in Boston, aspirin and wooden pallets. (11 Surprising Stock Market Indicators)
There are plenty of efforts to inject logic into these offbeat reference points, and some of it may be relevant. Wooden pallets, after all, ARE the basis for a lot of cargo movement, so watching their inventory levels may have some value. But at the end of the day, none of these indicators and theories is absolute. In the end the market, just like the weather six weeks from Feb. 2, is uncertain, regardless of what happened in January or the level of lipstick sales.
Still, we like to watch the groundhog. It's fun. Just like hemlines.
Unfortunately, fun indicators sometimes reinforce overly bullish sentiment in investors, especially when experts and pundits are talking up the market. And we've certainly had that lately, from well-regarded professors (Jeremy Siegel: Dow will hit 15K) to equity strategists (Thomas Lee: 4 Years to Dow 20K) to bank CEOs (Lloyd Blankfein: People are Under Invested).
Of course, we've had some naysayers recently as well. Marc "Dr. Doom" Faber warned of an impending pullback and stock pro Byron Wien suggested that January's gains will disappear by the end of the year. Indeed, as pointed out by Jeff Cox on our website earlier this week, there's a lot stacked up against the January Barometer, whether you buy its track record or not. But in the midst of Dow 14,000 euphoria, the counter balance of the bear voices can get lost.
Let's just hope no investors wake up six weeks from now and wonder why the sun isn't shining on their portfolio.