Is the January Barometer a Reliable Indicator?

Open Access
Author:
Borhan, Yasmin
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Brian Spangler Davis, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • January Barometer
  • Russell 2000
  • S&P 500 index
  • NASDAQ 100
  • ROY returns
  • Exchange Traded Fund
  • Seasonal Trends
Abstract:
The January Barometer, which suggests that positive (negative) market returns in January predict positive (negative) returns in the following eleven months of the year, is examined using historical price data for three major market indices; the S&P 500 index, the NASDAQ 100 index, and the Russell 2000 index. For the 50-year period 1968-2018, it is found that there is a correlation between positive January returns on the S&P 500 and positive market performance for both February and the rest of the year, particularly when the Index has gained at least 4% in January. However, a down January is not a reliable predictor of an overall weak year. The same study over the 25-year period 1993-2018 shows that the success rate of a positive signal from the January Barometer as an indicator of future performance has diminished in the most recent 25-year period. A similar analysis for the NASDAQ 100 index over the 32-year period 1986-2018 shows that a negative January return does not exhibit any predictive significance, while a January gain primarily affects the magnitude of gains for the rest of the year, without any significant effect on the success rate. The January performance of the NASDAQ 100 index does not have any short-term predictive significance. Analysis of the Russell 2000 price data over the 31-year period 1987-2018 shows that a positive January return of at least 4% is a very good indicator of the Index's return for the rest of the year, whereas a negative return in January is not a reliable indicator of weak future returns. For both NASDAQ 100 and Russell 2000, it is found that January return is a much better indicator of their summer performance than their returns for the rest of the year.