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January Barometers Can Set the Tone


An economy that's gaining strength, coupled with falling energy prices, could very well keep the stock market on a positive trajectory in January.


I know there are some of you who have traded stocks, options and futures for years. But the majority of you have probably invested in stocks predominantly or even exclusively. It's OK if you haven't been active in either the options or futures markets to date. In fact, it's better than OK, because I'm here to help you to get started on the right foot!

Throughout the year, I plan to share Wall Street adages with you and describe what's behind them. In some cases, such as the Super Bowl Indicator (i.e., if the winner is from an AFC division, the markets typically fall, but NFC winners indicate an uptick for the year), there's really nothing but coincidence involved. And come Feb. 4 when Super Bowl XLI takes place in Miami, we'll be ready to see whether the correlation between the football champs and the market winners continues!

In other cases, there are some pretty powerful reasons why you should be aware of this adage -- and others -- because Wall Street says so!

S&P 500 Can Set the Tone for the Year

There's another extremely accurate predictor of what kind of year the stock market is going to have, and you don't have to go to a psychic to have your tea leaves read to figure this one out. The January Barometer is more than 91% successful in telling us what the market will do in a particular year, based on the S&P 500's performance throughout the month. And if the S&P is higher at the end of month than at the beginning, the theory says that we're set for an "up" year for the equity markets. It just doesn't get much better than that!

As a point of reference, Bob Stoll, who goes by the moniker "Doctor Bob," is the reigning champion of beating the point spreads for college football since 1999, with an average 58.8% accuracy level. That record has helped Doctor Bob to carve up the bookies. And with that as a benchmark, the January Barometer's record looks even more impressive!

Source: Wall Street Journal

So, right now, the stock market is telling us that the combination of falling energy prices and a stronger-than-expected economy is building a base for some nice returns in 2007. The Dow is up 93 points from the Dec. 29 close of 12,463, but that could disappear faster than Ohio State's lead after their opening kickoff return for a touchdown against Florida in the recent Bowl Championship Series game.

That's the thing about the January Barometer -- its predictive powers are based on the whole month, not just what happens on one day or one week. Sure, crude oil is down $8.20 (13.6%) since the last trading session of 2006. But if the situation in Iraq degenerates further into absolute chaos, we'd see the complete opposite reaction.

In addition to the price of crude, which is a pretty accurate measure of Middle East tensions, I follow the Volatility Index for the S&P 500 (VIX), which was down 20% in the past three sessions of trading. In layman's terms, this means that the market's perception of risk has been reduced dramatically.

An economy that's gaining strength, coupled with falling energy prices, could very well keep the stock market on a positive trajectory in January. But as Doctor Bob might say, even if the January barometer works 91% of the time, there will still be some bumps in the road.

That's why you've got Minyanville, and I look forward to an educational -- and, more importantly, profitable! -- year together!

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No positions in stocks mentioned.
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