What's the Best Way to Trade Using the January Barometer?

29 Pages Posted: 20 Jul 2009  

Michael J. Cooper

University of Utah - David Eccles School of Business

John J. McConnell

Purdue University

Alexei V. Ovtchinnikov

HEC Paris - Finance Department

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Date Written: July 4, 2009

Abstract

According to Streetlore, as embedded in the adage 'As goes January so goes the rest of the year,' the market return in January provides useful information to would-be investors in that the January market return predicts the market return over the remainder of the year. This adage has become known as the January Barometer. In an earlier paper (Cooper, McConnell and Ovtchinnikov, 2006) we investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns. We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, than the 11-month holding period return following negative Januarys. In this paper we update that analysis through 2008 and address the question of how an investor can best use that information as part of an investment strategy. We find that the best way to use the January Barometer is not the obvious one of being long following positive Januarys and short following negative Januarys, but to be long following positive Januarys and invest in t-bills following negative Januarys. This strategy beats various alternatives, including a passive long-the-market-all-the-time strategy, by significant margins over the 152 years for which we have data.

Keywords: January Barometer, return predictability

JEL Classification: G12

Suggested Citation

Cooper, Michael J. and McConnell, John J. and Ovtchinnikov, Alexei V., What's the Best Way to Trade Using the January Barometer? (July 4, 2009). Available at SSRN: https://ssrn.com/abstract=1436516 or http://dx.doi.org/10.2139/ssrn.1436516

Michael J. Cooper

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

Alexei V. Ovtchinnikov (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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