U.S. stock market is up so far in January. Usual “January Effect” theory goes something like this — if the market is up for first 5 trading days of the year, it augurs well for the whole year. If the market is up in January, the same sentiment holds true. This year, January seems to the profitable month unless some major company announces disappointing earnings in the next one week.

Market historians are fascinated by the January effect because it often sets the tone for the rest of the year. Stocks were up at the start of January last year. 2009 made of lot of investors happy. Personally, I don’t believe in these kind of theories, because anything can happen in the next 11 months. However, when many traders, investor and historians believe in this theory and hype about it when February comes, it will generate lot of enthusiasm in the market. That’s what I am looking for!

S&P 500 index is down by 8.57% this month. That’s very bad news for the people like me that believe in January barometer theory. The theory goes like this — if stock market goes down in January, it will likely go down for the entire year. It’s not a superstition. It’s a documented fact. This theory was wrong only in few years like 2003 where the stock market was down 2.7% in January but still ended the year with 26.4% gain.

I hope that this year may prove the theory wrong. But, I don’t want to bet on it. There are so many unknowns at this point. Everyone is expecting some kind of miracle from the fed. However, with the speed our politicians are moving to solve the current crisis, I am not sure whether we can see the light at the end of the tunnel. State governments don’t have enough funds to give it to unemployed. Even rental car companies are asking for bailout. I don’t know where all these would end. January barometer would be proved wrong only if the government is able to get the $700 billion bailout (and $819 billion bailout) quickly and generate lot of jobs as Obama promised.

Related Link: January drop is not a welcome sign for 2009