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It’s called the “January Barometer.”

You may’ve heard of it.

It’s the long-held belief that the performance of the markets in January is a worthy indicator of how they'll perform for the rest of the year.

“The January Barometer has an impressive track record,” says our colleague Bob Byrne.

“If,” he added, “you listen to the guys who invented it.”

Today, we invite Bob to explain if this indicator holds weight… how the 2023 bear is looking so far… and whether or not we’re out of the woods.

(Hint: no.)

More in a moment.

First, quick question…

Tomorrow Will Be Too Late

Do you live in one of these 38 states?

If so, our colleague has issued a stark warning about a fast-moving situation in the USA.

Unfortunately, it can’t wait.

Click here now. (By tomorrow, it’ll be too late.)

And read on.

The January Barometer: Truth or Fiction?

Bob Byrne

As I type this, we're about halfway through January, and investors are excited by the stock rebound over the past couple of weeks.

Let's talk about the rebound for a minute because with the S&P 500 up 4.15%, the Nasdaq up nearly 6%, and the Russell 2000 Small Cap index gaining an incredible 7.3%, Wall Street is demonstrating a marked increase in its appetite for risk assets.

Now, we can't talk about early-year stock market gains without addressing the January Barometer.

The January Barometer: Truth or Fiction?

The concept of the January Barometer was devised by market analyst Yale Hirsch way back in 1972. The publication he founded, the Stock Trader's Almanac, was known for identifying seasonal patterns that occurred in the market.

The January Barometer was one of them.

The basic idea behind this nugget often boils down to, "As goes January, so goes the year." The real tendency is a lot less sexy.

Hirsch's hypothesis says that if the stock market closes higher in January, then 70% of the time, it will close above January's gains at the end of the year. Don't get too excited. That means if the S&P 500 closes three index points higher in January, then closing four index points at the end of the year fits the pattern. Not that impressive.

The flip side is even less helpful…

If the major indices close lower in January, "the potential for the rest of the year to be positive reverts to its normal 55%." So a down January doesn't mean a down year. Only a potentially less bullish year than with a higher close.

Again, not a particularly big edge for investors.

The January Barometer has an impressive track record… if you listen to the guys who invented it.

According to the Stock Trader's Almanac:

Devised by Yale Hirsch in 1972, the January Barometer has registered eleven significant errors since 1950 for an 84.5% accuracy ratio.

They neglect to mention that between 1945 and 2021, the stock market generated a positive annual return 70% of the time. So, does a rally in January predict further strength? Or are these January "signals" just part of a larger bull market?

It's a basic fact of trading that the market generally goes up 80% of the time. A better interpretation might be that a higher January warns against "fading" or going against (shorting) the trend.

That said, we're currently in a bear market. So a higher close this January may be worth watching if only to see how the hypothesis plays out.

Respect the Trend Until it Bends

I'm not suggesting you ignore all trend predictors (or even the January Barometer). The January Barometer is a trend predictor. Ostensibly it shows market tendencies given its performance during a particular time of year.

It's good to know the seasonal tendencies of how markets behave.

Since 1950, stocks have come under significant pressure during midterm election years suffering intra-year pullbacks ranging from 4% to a hefty 37%.

But, in the following years, the market saw substantial bounce backs returning from 8.7% to a stunning 57.7%!

Every year!

The stock market was under significant pressure last year. Should we jump on board in 2023?

Not so fast. Remember the age-old disclaimer: "Past performance does not guarantee future results." Market tendencies like these are helpful to understand, but you don't want to bet the farm on them because you still have to respect the company and economic fundamentals.

And with the Fed still hiking rates, upcoming corporate earnings likely to disappoint, and a high probability of a recession beginning in the second or third quarter, there's still a chance that we can derail this rebound and send stocks back down toward their bear market lows.

Today the Fed is smack in the middle of a rate-raising frenzy. Capital isn’t cheap anymore. And “don’t fight the Fed” may be the one maxim worth listening to!

In addition, the rest of the economy needs to be on the upswing as well: things like GDP, personal spending, hiring and wages, and the like should all be expanding -- Especially hiring and wages.

Remember this…

No sustained uptrend ever began with employment cuts!

Finally, one big warning: Remember that bear market rallies — the kind that doesn’t follow through — are almost always sharp rebounds. (Typically driven by short covering.)

They go up fast, but they collapse just as quickly.

So it’s OK to keep an eye on how the market ends up this January. Just make sure you factor in the other important drivers of the stock market as well.

S&P 500 (SPY)

Part of what makes bear market trading so difficult is that just as you’re turning bullish and beginning to fear that you might miss out on the next great rally, demand vanishes, and prices sink back toward the prior lows.

The SPY is currently testing its bear market downtrend line, and while I would love to tell you the coast is clear and it’s time to load up on stocks, I can’t.

While plenty of traders will be tempted to buy the SPY as prices rise above $400 and the downtrend line, we still have a ton of trapped longs between $400 and $420. So, while I expect the SPY to trade higher over the near term, I do not expect a sustained rally to carry the SPY through $410 and $420 toward $450.

My approach to trading the SPY is simple.

As long as prices remain above $386, we can look for a bullish continuation toward $410 or $420. But as the SPY approaches $410, I would dial back your bullishness FAST, as sellers are likely to materialize out of thin air.

As much as we all want this bear market to end, I want to be cautious ahead of earnings season as companies will likely prepare Wall Street for disappointing first and second-quarter 2023 results.

Nasdaq Composite (QQQ)

Unlike the SPY, which benefits from exposure to oil and gas, healthcare, and industrial mining companies that have seen their share prices soar, the Invesco QQQ Trust (QQQ) continues to be weighed down by its massive exposure to the high-priced tech industry.

While the QQQ has bounced smartly to start 2023, let’s not kid ourselves, this is not a bullish-looking chart. At least not yet.

Over the near term, the bulls must chip away at overhead supply between $295 and $300. Once we begin to close weekly bars above $300, I expect the fear of missing out (FOMO) to attract underinvested traders back to this market and push prices toward $330.

While I am long the QQQ in a long-term account, short-term traders should not expect the push above $300 to be easy. However, as long as the QQQ continues to close above $269, a window is open for the bulls to sneak in and bid prices up toward $300. And another 20-point rally from $280 is worth more than 7%, and that’s not too shabby for index trade.

Gold (GLD)

I don’t wear a tinfoil hat, and I don’t have much use for shiny rocks, but a proper trader will trade just about anything if the risk-reward makes sense and technicals line up. And that’s why gold is one of my favorite assets for 2023.

I typically invest in companies, not commodities. So while I don’t own any SPDR Gold Trust (GLD) or physical gold, I am invested in shares of Newmont Mining (NEM).

Thanks to the breakdown in GLD last fall, the technical picture for gold is pretty easy to understand.

In a nutshell, GLD was stuck in a wide price band between approximately $193 and $157. And while this channel held for more than two years, it broke down last September, and gold bears tried to force the price of gold lower.

Suffice it to say the bears lost. And when GLD soared back above the $157 breakdown level in early November, anyone that sold GLD when it broke down in September was left holding a money-losing position -- and they were squeezed into covering.

With GLD now firmly back inside its prior channel, our target is the top of the band, near $193. Once price tests the top of the channel, we’ll reevaluate the chart to determine whether the bulls have the energy to trigger a new bull market and push GLD toward $200.

If you’re looking for an area to buy GLD on a dip, keep an eye out for price stabilization between $172 and $168. As a temporary gold bull, I don’t want prices to sink below $162.

Disclosure: I am long shares of Newmont Mining (NEM) and Invesco QQQ Trust (QQQ)