When it comes to the month of January, analysts tend to look forward instead of back. That is because of the “so-called” January barometer, which postulates that the market will perform for the year — for better or worse — the way it performed in January. This theorem has taken some hits during the past decade, performing no better than a coin flip (see “Breakout” page 63). Barring a strong Q4 selloff in the S&P 500, it will be wrong in 2016 as the S&P 500 is up about 100 points following a terrible January. That would put it at around 4-4-2 the last decade by our calculations (ties are years the market was up in January and the year overall, but less than the gain for January).
The barometer was correct 11 of 14 years from 1995 through 2008, including every year from 1995 through 2000, though that is more attributable to the massive bull market than any January effect. It was also correct all but one year in the 1970s.
As for historical performance, January is in the middle of the pack for the Dow Jones Industrial Average Index and S&P 500, but was the best month for the Nasdaq composite. We decided to investigate if this anomaly had anything to do with the sector itself or simply because our data on the Nasdaq only goes back to 1971. Turns out that while the performance of the Dow and S&P improved when measured from 1971 on, it did so only marginally (5th best month in both indexes). This is an important distinction for the technology heavy Nasdaq and hints at possible seasonal trends and arbitrage opportunities. Perhaps “buy tech and sell the rest” will be the new January trade.