'January Barometer' predicts good year for stocks

NEW YORK -- Like a speedy thoroughbred in a six-furlong race or a sprinter in the 100-yard dash, the stock market has a history of performing better in the year-long performance race when it gets off to a fast start.

Since 1950, stocks have finished lower for the year only three times after posting gains in January, says the Stock Trader's Almanac, which created the closely followed "January Barometer" in 1972.

This barometer states that "as the S&P 500 goes in January, so goes the year." This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks . Its strong track record is a big reason why the market's 4.4% gain in January, its biggest first-month gain since 1997, has raised Wall Street hopes that good times will continue, and stocks will finish the year with gains despite headwinds from Europe's debt crisis and a still-sluggish U.S. economy.

"An up January averts disaster 96% of the time," says Almanac editor Jeffrey Hirsch, noting that there's been only two really ugly down years following gains in January — 13% losses in 1966 during the Vietnam War, and in 2001, after the 9/11 terror attacks.

Stocks tend do well after bullish starts to the year because it boosts investor sentiment.

"Anything to help confidence in this market is a good thing," says Russell Croft, manager of Croft Value fund.

Early-year gains also give investors a sense that things are heading in the right direction. "There is also a momentum factor," adds Andrew Fitzpatrick, director of investments at Hinsdale Associates.

But both Croft and Fitzpatrick warn that in the very unpredictable and volatile financial world we live in, the predictive value of the January Barometer might be less reliable. They say bad financial outcomes can't be ruled out due to a world awash in debt, financial instability in the eurozone and slowing economies in the developed world.

"Stocks are off to a very solid start, but that's a little like saying you trust the Cubs are on their way when they are in first place in May," Fitzpatrick says. "It's a little too early. It seems like only a matter of time before some shock sets the market off on a downward spiral."

On the bright side: The market has posted double-digit annual gains all 18 times it has risen 4% or more in January, the Almanac data show.

Hirsch says headwinds, such as the financial crisis in Europe and the still-weak jobs and housing markets in the U.S., are not likely to completely negate the January Barometer's bullish forces. Instead, those worries will "cap, or temper," the market's upside. He expects gains of 5% to 10% in 2012.