I first wrote about the January Barometer back on January 1. This indicator simply says as goes January, goes the rest of the year. As I noted last time, this indicator does appear to have a good deal of accuracy to it.
What really stood out to me is last year the DJIA was up big last year. We define ‘big’ as more than 3.5% gain for the month. As we noted last year at the time, this was actually more bullish. It was met with a good deal of skepticism, but sure turned out to be a key warning last year was going to be special.
Well, now look where we are in 2014 – this time we’re having a big down month! And that chart above would suggest that a big down January doesn’t bode very well for the rest of the year.
Now here’s where things get interesting, diving into the worst January performances since 1950, turns out the bigger the loss – the better the rest of the year does.
Turning to the data below, out of the six worst January drops since 1950, the DJIA was up the rest of the year five of them. The average return for all six the rest of the year is a rather solid +9.76%. Now, the kicker is the next six weakest months of January saw some decent weakness, with five of six lower the rest of the year.
The bottom line is a significantly lower January isn’t a huge bearish signal and as crazy as it seems, if you are bullish for 2014 – you might want to see some more weakness to end this month.