Home, choices, BAROMETER, timing, backtest, signal, buy, sell, watch
The January Barometer
The January Barometer is a reliable market forecasting tool. Market trends and the Volatility Index are not.
The January Barometer
Yale Hirsch popularized the January Barometer. The Barometer states that the direction of the market in January is likely to persist for the remaining eleven months of the year. January is the only month that can forecast a decline, as calculated for the S&P 500 Index:
Eleven months seems like an arbitrary period. Therefore daily performances of the S&P 500 after a negative January Barometer were analyzed during 1950-2011, and during 2000-2011 to see if recent behavior was similar:
Failure to take defensive measures would have resulted in losses during Apr 11 - Oct 27 of 115.94 boxes during 1950-2011 and 41.65 boxes during 2000-2011. Therefore, start defensive action on the first trading day before April 11 and end defensive action on the first trading day before October 28.
The gains during the defensive periods were calculated:
The signals were not always correct. Nevertheless, during the defensive periods the market lost an average of 5 boxes when the signal was negative and gained an average of 4 boxes when the signal was positive.
Market trends
It might seem that following market trends would be a viable alternative to the January Barometer, but the market has such an upward bias that this is not effective. Whether filtering for 5 box, 10 box, or 20 box reversals, the downtrends in the S&P 500 Index average about twice the minimum. The sell signals occur halfway down, so the subsequent buy signals would be near the level of the sell signal.
Minimum Boxes -5 -10 -20 Average Boxes -10.28 -20.15 -37.50
An alternative way of determining market trends is with 50-day and 200-day moving averages in the S&P 500 Index. An intersection is called a golden cross if the 50-day rises through the 200-day, or a death cross if the 50-day falls through the 200-day. The gain from a death cross to a golden cross averages 0.03 boxes, meaning that acting on death crosses is not profitable.
The Volatility Index
The Volatility Index (VIX) is designed to measure option buyers' expectations of stock market volatility in the next 30 days. Usually, a high VIX means that options traders are bearish and willing to pay a high premium to protect against a decline. Usually, a low VIX means that options traders are bullish and think protection is unnecessary.
Two tops and two bottoms in the S&P 500 are marked with green vertical lines:
For the VIX to be a useful forecasting tool, it would have to lead the S&P 500. The period from the first bottom to the end is roughly an inverse relationship, with the VIX bottoming one year before the second S&P 500 top and peaking shortly before the second S&P bottom.
The period from the start to the first bottom is roughly a direct relationship, with the VIX peaking two years before the first S&P top. The VIX failed to predict the first S&P bottom.
The inverse relationship of the latter years seems valid. However, it is belied by the direct relationship and the predicting failure of the early years, so the VIX cannot be trusted as a forecasting tool.