Trader’s Narrative

Groundhog Day is only a few days away! According to lore, if the groundhog sees its shadow, we’re going to have another 6 months of winter. If on the other hand, it fails to see its shadow, winter will end soon.

The January barometer can be likened to ground hog day but it has more historical evidence. The January barometer basically says that the performance in the first month of the year, predicts the market’s return for the rest of the year.

The S&P 500 Index (SPX) started January at 902.99 and ended the month at 825.88 for a return of -8.5%. The Dow fared worse with an 8.8% drop. For both indices it the worst January return on record.

So the groundhog has definitely seen its shadow and the bear market will continue.

The only faint silver lining is that the historical basis for a negative prediction is very flimsy. Probably due to the upward bias of the stock market over the very long term, the prediction quality of the January barometer is higher in bull markets. So this prediction of a continued bear market has only about a 40% chance of being accurate.

UPDATE:
Here’s an interesting related article by Nick Godt at MarketWatch