Michael Jordan took his final shot as a professional basketball player in April of 2003. Thanks to some shrewd planning on my part, I was sitting in the stands with my 10-year-old son at the old Spectrum stadium in Philadelphia, Pennsylvania.

On our way in to the game, someone offered me $1,000 for our two tickets but there was no way that I was going to let my son miss Jordan’s last game. Bill Cosby and other local luminaries were also in attendance that night, wanting to witness a bit of history and wish a basketball legend farewell.

Jordan’s final shot, a late in the game free throw*, didn’t really have any bearing on the game's outcome as his team was losing by a wide margin. But because it was the last shot by arguably the greatest NBA player ever, the event and moment were noteworthy.

Jordan seemed to play basketball at superhuman levels averaging over 30 points per game throughout his NBA career. When my son and I saw him play his last game, he was 40 years old and still competitive (he averaged 20 points per game in his final year!), but he was certainly a shadow of his younger self.

Like Michael Jordan playing pro ball at age 40, today we take a look at a once great indicator that seems to be past its prime as well. The well-known January Barometer seems to be losing its predictive powers, as we shall explore below.

Too Many January Indicators!

With all the different indicators flying around with the word “January” in the name, let me clarify which one we’ll be looking at today:

• The January Barometer was devised in 1972 by Yale Hirsch of Stock Trader’s Almanac fame. It states that as the S&P 500 goes in January, so goes the year. We’ll look at some statistics for this once-impressive indicator below.
• The First Five Days of January (discussed in last week’s article) holds that the first five trading days of the year predict the market action for the rest of the year. We busted that myth last week.
• The January Effect is not an indicator but an observed phenomenon that small cap stocks outperform the big caps in January. We described the merits of this observation in an article at the end of November. While we noted that the effect still exists, it now occurs earlier, and the January Effect has become the Second-Half-of-December Effect.

Fading Fast

On the surface, the January Barometer has had an impressive track record with 88.7% accuracy over the past 62 years. This does not include any year that the market moved less than 5% in either direction, which would be labeled neutral or flat. I believe not counting flat years for or against the track record is a reasonable exception. Unlike its close cousin, the First Five Days indicator, the January Barometer has done a credible job of predicting up and down years—it has only been wrong seven out of 62 times. That is, until we look at its recent performance.

If we break out the January Barometer predictions by decades, we see a problem. Let’s look at how many misses (an up January followed by a down year or vice versa) and how many flat years there have been per decade. Once we subtract misses and flat years from 10, the remaining years in the decade are the ones that the indicator can claim to have been helpful.

As you can see, the efficacy of the indicator has dropped off in the last decade. Additionally, if you add 2011 (a flat year) to the most recent decade, the indicator has been useful only in 4 out of the last 11 years. While eleven is not a statistically significant sample size, the low hit-rate still raises the question as to whether a once robust indicator is no longer useful in predicting market direction.

What Happened?

There may have been structural changes in the markets. Or perhaps the tax selling of stocks from December that turned into January buying is no longer a significant factor. For that matter, none of the other conventional reasons given for why the market's behavior in January is important have been significant either (e.g., new institutional money being added to the market, congress convening and passing bullish or bearish legislation).

Regardless of whether underlying investing practices have changed, prudence would dictate that we give an indicator that has underperformed in the last 11 years less importance in our list of predictive tools for the coming year.

I’d love to hear your thoughts and feedback—just send an email to drbarton “at” vantharp.com. Until next week…

Great Trading,
D. R.

*Jordan made the basket.

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