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Does a lousy performance in January mean that stocks will fall for all of 2014?
Believers in the “January barometer” would say yes. Their theory is that “as January goes, so goes the year.”
An objective look, however, suggests that the odds of a market decline in 2014 are 50-50 after a poor January.
From 1950 through 2013, the direction of the market in January was also the direction of the market for the full year 78.1% of the time.
That sounds pretty good. But when evaluating any indicator, in the stock market or otherwise, it’s useful to compare it to a naive forecasting model.
For example, in measuring the accuracy of a weatherman, one might compare his or her accuracy with that of a naive model that forecasts every day’s weather will be the same as the day before.