1. Kitco Metals Inc.
  2. Commentary Archive
  3. Bio

January Barometer Flashes Red: Stock Market Warning Signal

The "January Barometer" is a popular stock market indicator devised by Yale Hirsch in 1972, editor-at-large of the Stock Trader's Almanac.

The premise is simple. As the S&P 500 goes in January, so goes the year.

If the S&P 500 is up at the end up January that foretells of a bullish year for stocks, and on the flip side if the S&P 500 is down at the end of January that warns of bearish year in stocks.

Let's look at the numbers as January comes to an end:

  • The S&P closed out January down 3%,
  • nearby Comex gold futures gained 8% year-to-date.

Does this January Barometer indicator actually work? Market analysts say yes.

"Based on S&P 500 data going back to 1928, January is a good predictor of the year. When January is up, the year is up 80% of the time with an average return of 13.0%. When January is down, the year is up only 44% of the time and the S&P 500 has an average decline of 1.9%," according to a BofA Merrill Lynch Global Research report.

Another factor that warns of potential disruption in the stock market in 2015 is the sheer age of the current bull market phase. The latest bull market cycle in stocks began in March 2009. "There is a good chance we will celebrate year six in March," said Sam Stovall, U.S. equity strategist at S&P Capital IQ.

"But, only two of the prior 11 bull markets since WWII made it to year seven," Stovall added. "We are skating on thin ice. The trend is your friend until it ends."

Historically, the start of a Fed tightening cycle has also proven to be negative factor for stocks and analysts are still widely expecting a US rate hike this year.

Stovall studied the impact of interest rate tightening cycles since World War II, even if that only meant one rate increase.

He found that stocks reacted negatively in the six months prior to the first rate increase:

  • In six instances since World War II, the stock market saw a pullback of 5-10%,
  • in four instances since World War II the stock market underwent a correction of 10-20% and
  • in three instances a bear market in stocks, which includes a retreat of 20% or more ensued.

What could this all mean for gold?

Gold and stocks generally tend to have an inverse correlation. As investors shift out of paper assets, such as stocks, cyclical tendencies support a move into hard assets like gold. A pullback, correction or bear market in stocks could send more investors into the safety of gold. Stay tuned. The year is just getting started.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y

Interactive Chart