The Stock Trader's Almanac

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'January Barometer' bodes well for 2007
Posted 1/31/2007 10:53 PM ET

By Adam Shell, USA TODAY

NEW YORK — If January lives up to its reputation as a good predictor of future stock market performance, then 2007 is likely to be another profitable year for stock investors.

Stocks rallied sharply on January's final day of trading Wednesday, bolstered by a statement released by the Federal Reserve that alleviated inflation fears and noted the economy was in solid shape.

The benchmark Standard & Poor's 500-stock index gained 9.42 points to 1438.24, finishing the month up 1.4%.

That positive return bodes well for stocks going forward. The so-called January Barometer, created by Yale Hirsch of the Stock Trader's Almanac, suggests that "as January goes, so goes the market" for the rest of the year. The Almanac says the barometer has registered only five major errors since 1950 and has a 91% accuracy rate.

More important, an analysis by Banc of America Securities shows that a positive return in January increases the odds that the S&P 500 will post gains in the final 11 months of the year. Since 1926, when the S&P 500 was up in January stocks have delivered gains in the February-through-December period 80% of the time.

"Now that the S&P 500 has posted a gain for the first month of 2007 … it may help fuel a trading rally for a few days," noted Tom McManus, strategist at Banc of America Securities.

The Fed's statement was viewed positively by traders because it jibed with Wall Street's preference for a not-too-hot, not-too-cold economy, often referred to as a "Goldilocks economy."

It also helped assuage fears that the central bank would need to start raising short-term interest rates again to cool the economy. In general, higher rates are bad for stocks because they result in higher borrowing costs for consumers and businesses, resulting in a drag on consumer spending and corporate earnings.

"The Fed calmed some fears," says Todd Leone, head of trading at Cowen & Co. "People were concerned that the Fed would have to raise rates again. But now it looks like going forward the Fed will stand pat. And that is a positive."

Investors who favor blue-chip stocks apparently liked what the Fed had to say. The Dow Jones industrial average rallied more than 98 points to 12,621.69. If it had closed just another 0.09 points higher, the Dow would have topped its all-time closing high a week earlier and notched its 27th record since the end of September.

The January Barometer has earned a strong following throughout the years due to its accuracy.

"Stock market historians love the statistics and seasonal patterns of historical returns because they believe the calendar cycles tend to repeat themselves in a predictable way based on factors such as politics, investor psychology, money flows and taxes," McManus wrote in a report to clients Wednesday.

But history aside, not everybody on Wall Street is convinced the market's performance in January has any bearing on what happens the rest of the year.

"It has little predictive power," writes Ken Fisher in his new book, The Only Three Questions That Count: Investing by Knowing What Others Don't.

Find this article at:
http://www.usatoday.com/money/markets/us/2007-01-31-mart-usat_x.htm?csp=34