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Abstract:
Many investment practitioners rely on the 'January Barometer', namely, they believe in the theory of 'as goes January, so goes the year', which is fundamentally related to the well-known January effect. Unlike many prior studies that examined the well-known January effect per se, we investigate the issue of whether or not the signs of January returns have superior predictive value for future stock returns vis-a-vis the predictive value of the signs of returns in any other calendar month.

Using NYSE equal-weighted stock index, we confirm the existence of the January effect in the sample period of 1941-2002 with both unconditional and conditional evidence, and we document two additional manifestations of the well-known January effect. We also introduce a new type of January effect, namely the signs of January returns have superior predictive value vis-a-vis the signs of any other calendar month's returns for the purpose of predicting the next 12-months' returns.

January effect, signs of current returns, predicting future returns

Abstract:
Many investment practitioners rely on the January barometer, which argues that: as goes January, so goes the rest of the year (i.e., the next 11 months). Hensel and Ziemba (1995) investigated the validity of the January barometer, concluding that it works well, especially when January is an up month. However, their research design lacks a benchmark so one cannot infer from their study if January is special vis-a-vis other calendar months. We benchmark the January barometer against other calendar month barometers by examining returns in the 11 calendar months subsequent to each of the12 calendar months. In contrast to Hensel and Ziemba (1995), we show that the January barometer is an excellent bearish indicator when January is a down month, but it is a poor bullish indicator when January is an up month. Our results suggest that investors should treat a down January as a signal to stay out of the market, but that they should not treat an up January as a buy signal for the next 11 months.

January barometer, signs of calendar month returns, predicting future returns