Investing with the January Indicator

08Jan10

One small addendum to our analysis of the January Indicator (i.e. January’s ability to predict returns for the rest of the year). How would have an investor fared over the last 80 years only investing based on the January Indicator?

[logarithmically-scaled, annually-scaled, growth of $10,000]

The graph above shows the results of an investor going long the S&P 500 index every January, but moving to cash for the remainder of the year if January closed down (otherwise staying invested). The strategy is in red versus buy and hold in blue. I have not accounted for transaction costs or return on cash.

This strategy would have only been invested in the market approximately 66% of the time, increased annual returns by about 2.7%, and reduced downside volatility.

Nothing much more to say about that. For use in your next polite dinner conversation.

[click for a summary of all recent posts about January Indicators]

Happy Trading,
ms

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