A Lesson in Stock Market Signals

The major stock indexes had negative returns for January. That presents a good opportunity to review market indicators and how not to use them. A well-regarded and -known indicator is the January signal or January barometer. It is what many investors look for: A simple, straightforward indicator that requires little analysis and has a solid record. The indicator says that when stocks have a negative return in January they are likely to have a low return for the full year. When they have a positive return for January, they are likely to have an above average return for the year. Mark Hulbert summarizes the rule and its record.(Subscription might be required.)

You shouldn’t sell stocks because of this signal. First, even when stocks have a negative return in January, on average they have a positive return for the year. It’s barely positive, on average but still positive. Also, the data are only averages. There’s no way of knowing whether this year will be average, above average, or below average. Plus, the number of years used to compute the barometer is low. It doesn’t meet a definition of a statistically significant data set.  Finally, I recommend only following rules and indicators when you have a theory to back up the data. There’s no theory to back up this one other than basic momentum. And you can use any other momentum indicator in your investing and reach the same or better results.