The January Barometer: Myth And Reality by Jay Kaeppel
Some claim the January Barometer is a great forecasting tool, while others say it is totally without value. As usual, the truth lies somewhere in between.
First, let's define exactly what the January Barometer is. Originally, the theory behind the January Barometer was that "as January goes, so goes the year." If the market closed January with a gain, the market should close that year with a gain. Conversely, if January was down, then the year as a whole should be down. For our purpose of attempting to use the January Barometer as an actual investing tool, let us change the definition slightly to read, "As January goes, so goes the rest of the year." For the barometer's signal to be considered correct, if the market rises in January, the market also would have to rise higher between the end of January and the end of the year. Likewise, if January is down, then the period between the end of January and the end of the year would have to be down for the January Barometer to be considered as having given a correct signal.
This adjustment is important for the following reason: If the market rose 6% in January but only 5% for the year, the original rule would say that the January Barometer was correct because the market was up in January and up for the year, even though prices actually declined between the end of January and the end of December.