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The January Barometer: An Indicator Losing Its Edge by D.R. Barton, Jr.
Synchronizing Your Trading Systems Into an Effective Strategy by Ken Long, D.M.
Is Trading Based on Market Type Really Just Trend Following?
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The January Barometer: An Indicator Losing Its Edge
Michael Jordan took his final shot as a professional basketball player in April of 2003. Thanks to some shrewd planning on my part, I was sitting in the stands with my 10-year-old son at the old Spectrum stadium in Philadelphia, Pennsylvania.
On our way in to the game, someone offered me $1,000 for our two tickets but there was no way that I was going to let my son miss Jordan’s last game. Bill Cosby and other local luminaries were also in attendance that night, wanting to witness a bit of history and wish a basketball legend farewell.
Jordan’s final shot, a late in the game free throw*, didn’t really have any bearing on the game's outcome as his team was losing by a wide margin. But because it was the last shot by arguably the greatest NBA player ever, the event and moment were noteworthy.
Jordan seemed to play basketball at superhuman levels averaging over 30 points per game throughout his NBA career. When my son and I saw him play his last game, he was 40 years old and still competitive (he averaged 20 points per game in his final year!), but he was certainly a shadow of his younger self.
Like Michael Jordan playing pro ball at age 40, today we take a look at a once great indicator that seems to be past its prime as well. The well-known January Barometer seems to be losing its predictive powers, as we shall explore below.
Too Many January Indicators!
With all the different indicators flying around with the word “January” in the name, let me clarify which one we’ll be looking at today:
- The January Barometer was devised in 1972 by Yale Hirsch of Stock Trader’s Almanac fame. It states that as the S&P 500 goes in January, so goes the year. We’ll look at some statistics for this once-impressive indicator below.
- The First Five Days of January (discussed in last week’s article) holds that the first five trading days of the year predict the market action for the rest of the year. We busted that myth last week.
- The January Effect is not an indicator but an observed phenomenon that small cap stocks outperform the big caps in January. We described the merits of this observation in an article at the end of November. While we noted that the effect still exists, it now occurs earlier, and the January Effect has become the Second-Half-of-December Effect.
On the surface, the January Barometer has had an impressive track record with 88.7% accuracy over the past 62 years. This does not include any year that the market moved less than 5% in either direction, which would be labeled neutral or flat. I believe not counting flat years for or against the track record is a reasonable exception. Unlike its close cousin, the First Five Days indicator, the January Barometer has done a credible job of predicting up and down years—it has only been wrong seven out of 62 times. That is, until we look at its recent performance.
If we break out the January Barometer predictions by decades, we see a problem. Let’s look at how many misses (an up January followed by a down year or vice versa) and how many flat years there have been per decade. Once we subtract misses and flat years from 10, the remaining years in the decade are the ones that the indicator can claim to have been helpful.
||# Helpful Years
As you can see, the efficacy of the indicator has dropped off in the last decade. Additionally, if you add 2011 (a flat year) to the most recent decade, the indicator has been useful only in 4 out of the last 11 years. While eleven is not a statistically significant sample size, the low hit-rate still raises the question as to whether a once robust indicator is no longer useful in predicting market direction.
There may have been structural changes in the markets. Or perhaps the tax selling of stocks from December that turned into January buying is no longer a significant factor. For that matter, none of the other conventional reasons given for why the market's behavior in January is important have been significant either (e.g., new institutional money being added to the market, congress convening and passing bullish or bearish legislation).
Regardless of whether underlying investing practices have changed, prudence would dictate that we give an indicator that has underperformed in the last 11 years less importance in our list of predictive tools for the coming year.
I’d love to hear your thoughts and feedback—just send an email to drbarton “at” vantharp.com. Until next week…
*Jordan made the basket.
Sydney, Australia Workshop Line-Up
A Mid-March Peak Performance 101 Has Been Added!
Blueprint for Trading Success
Medina Sydney Hotel
This is a complete structured program in which you’ll learn strategic, focused steps that will serve you throughout your entire trading career. During these intensive, hands-on three days, you will learn 17 clear and concise tasks to master that will take your trading from ho-hum to visionary. You will leave with a thorough checklist of action steps to guide you to a higher level of performance. More...
How to Develop a Winning Trading System That Fits You
February 28-March 1
Medina Sydney l Hotel
|Our job in this workshop is to teach you what you need to know to develop your own system. The material you will learn is not market or time-frame specific. So whether you trade stocks, futures, currencies or gold, etc., or whether you place 50 trades per day or 50 trades per year, you will learn all of the components that work in any system. More...
Peak Performance 101
Mercure Sydney Hotel
|Understand why some people consistently make profits over and over again, while others are erratic and unsuccessful. More importantly, you’ll learn how to overcome self-sabotage and develop rock-solid discipline in your performance in the
Synchronizing Your Trading Systems Into an Effective Strategy
Achieving integration and synergy is a critical part of the military planning process as well as a critical part of trading successfully.
Military units achieve integration and synergy through a process of phasing, control measures, decision criteria, a synchronization matrix and rehearsals. Each of these can be a great to help you improve your trading performance.
Phasing identifies time frames for trading that have a clear beginning and an end. Within each phase, you identify appropriate strategies, purposes and objectives that are specific to that time period. Sometimes phases are driven by events; in other cases, they relate directly to times and dates. No matter what market or other distractions seek to divert your attention, you must be clear about which phase you are in and your corresponding trading strategies.
Control measures are reminders and/or decision aids that keep you abreast of approaching critical events and the boundaries you must stay within. These could include calendars, automatic reminders, key price levels for support and resistance, and alerts to begin preparing for increases in volatility or market reversals. These must be visible (or audible/kinesthetic depending on your preferred learning style) and actionable.
Decision criteria are quantitative definitions of moments when you must be ready to act. Your criteria could include price levels that cause you to enter or exit a position, or to adjust a stop to increase or decrease your position. It could be a combination of filtering or screening criteria that let you know you should start stalking in earnest, preparing your entry, or when a window of opportunity is ready to open or close. Reduce these to the most important actionable conditions so you do not fall victim to analysis paralysis.
Synchronization matrix is a graphical representation of all subordinate units and their key actions through time and phases. At a glance you can then see how separate but related operations must work together to achieve synergy, which happens when the whole is greater than the sum of the parts. You can do this for your trading systems with a matrix of the rules for each part: setup, entry, initial stop, etc.
Rehearsals are the way that good military units and good traders become great. By creating conditions close to the operational environment, you can experience as close to the actual decision environment as possible, so that in the moment you will be able to perform according to plan. Executing a trading strategy with real money, but at a reduced position size, in a live market is an example of creating rehearsal conditions as close as possible to live trading with your full position size.
Applying these five military planning concepts to your trading plan should help you achieve better execution of your carefully planned concepts.
About the Author: Ken Long is a retired Lieutenant Colonel in the U.S. Army with a D.M. in Organizational Behavior. He is a proud father of 3, a husband, teacher, student, martial artist, and an active trader. Ken is also a dynamic workshop instructor for the Van Tharp Institute. The above article was reprinted from Ken's blog. Read more of Ken's essays at http://kansasreflections.wordpress.com.
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Is Trading Based on Market Type Really Just Trend Following?
Q: Many years ago, I completed a couple of your audio programs, I have most of your books and, three or four years ago, I attended a few workshops.
I find everything you and your staff does illuminating. While I am trading better than I ever have, I feel I am still far below my potential. (Just to be clear, I believe no one is responsible for my results but me.)
Your advice to develop systems by market type makes sense; however, in any given moment, we only know what the market type has been, not what it's about to become. Doesn't that mean that our whole trading system is based on trend following the market type?
Have you or others done research on the persistence of market types? Are there macro conditions that would be valuable in determining market type other than the SQN® score? Are there macro conditions that favor a change in market type?
A: In any given moment, you can determine the market type right now, which can guide your trading system selection. Knowing the current market type also provides some level of what to expect next: Bull markets don't flip to bear markets without passing neutral, and strong bear (papa bear) markets start out as bear (baby bear) markets first. As for volatility, that can rise very sharply and suddenly, usually with a change in the directional component, but then it tends to decline slowly.
Length of market types could be somewhat useful but without that, just knowing the market type today helps you use trading systems that work right now.
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