January Signals in Technical Analysis

1. January Signals

One of the first indications that the Efficient Markets Hypothesis had flaws was the observation that in January the stock market appeared to have several consistent price patterns. The stock market cannot be considered efficient if every year the same pattern forms and can be traded profitably. For many years, this inconsistency with the hypotheses remained unanswered, but more recently the market’s January behavior has changed, likely because traders have taken advantage of the anomalies and dampened their profitability.

2. January Barometer

“As the Standard & Poor’s goes in January, so goes the year” is a basic contention proposed by Hirsch of Stock Trader’s Almanac. Statistical problems arise with this indicator, despite its popularity. First, if January is up, for example, the year starts with an advance and already has a leg up. Second, because the stock market has had a positive bias over the years, January usually is up as is the market for the year. When the periods and odds are broken down, the predictive value of the January barometer comes within normal statistical probabilities and is without predictive value.

3. January Effect

The January effect was a condition that lasted for many years. During January, small-cap stocks had a tendency to have abnormal strength. Although some analysts attributed this effect to investors timing trades for tax reasons in December and January, no one could explain why the January effect occurred in the magnitude it did. As a result, it became the darling of anti-random-walk theorists as an example of how the market can establish patterns that are profitable. In recent years, however, the January effect has not worked very well. Some say it has been arbitraged out of business.

Source: Kirkpatrick II Charles D., Dahlquist Julie R. (2015), Technical Analysis: The Complete Resource for Financial Market Technicians, FT Press; 3rd edition.