COMBINING THE JANUARY BAROMETER AND MIDTERM ELECTION YEARS

My December 14 message included the headline: ‘The Four-Year Presidential Cycle Suggests that 2014 Could Suffer A Major Downside Correction”. That message also suggested that two of the best months to take some profits were during January and April. [I further suggested that a major correction was more likely to take place between May and October, which could lead to a major buying opportunity during the fourth quarter of the year]. The fact that January turned out to be a down month makes that warning for a volatile year more likely. With the Dow down -5.3% for the month, and the S&P 500 losing -3.6%, the January Barometer has issued a negative warning. The January Barometer is based on the belief that “as January goes, so goes the year”. The January Barometer is backed up by market history. Credit for its discovery goes to Yale Hirsch who first wrote about it in the Stock Traders Almanac in 1972. According to the Almanac, the January Barometer has predicted the year’s stock market direction 76% of the time since 1950. It goes on further to state that “every down January in the S&P since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction” (Stock Traders Almanac 2014, p. 12). It goes on further to state that 10 of the last 16 midterm elections years followed January’s direction. The fact that the Barometer turned negative during 2014 (a midterm election year) raises the odds for a more volatile year for stocks. The good news is that midterm election years usually finish the year stronger than they start.