As January goes, so goes the year

That's an old, old Wall Street adage. So old, in fact, that I couldn't even track down its origins. What the maxim means is that the direction of January foretells the stock market's direction for the rest of the year (February through December) that is. Financial journalists love to pull this one out every year, particularly since a little quick math is impressive. In the 82 full years since and including 1926, this metric has worked 70% of the time. Considering markets are either up or down, 70% is much better than the coin flip odds would suggest. Or is it?

It turns out, that the market has been up in 76% of those years. Hmmm...a little further digging is required. After consulting a bona fide statistician (my stats are a little rusty, so I thought it would be good to confer with an expert), we can sort the results into logical buckets such as Jan Up/Rest of Year Up, Jan Down/ROY Down, etc. When we do this and compute the odds, we find the following:

If January is up, the probability the rest of the year is up is 70%. Considering that the market has risen in 76% of those years, this makes intuitive sense.

If January is a down month, however, the probability that the rest of the year is down is just 35%. Not such a good predictor if it only works in one direction is it?

This means that the effect is simply a result of the long term rise in stock prices. In fact, only 1% of the variation in yearly performance is explained by January's performance, statistically speaking. Next time someone drops the old "as January goes..." on you, I encourage you to educate them or stop reading their article immediately.