According to market lore, January has two special attributes. It tends to be a good month. And, good or bad, it tends to predict the rest of the year. The first tendency is the "January Effect". The second is the "January Barometre".

The January Effect seems alive and well. Last month the Standard & Poor's 500 Index was up 3.1% (including dividends). The Dow Jones Industrial Average was up 1.8%, and the Nasdaq was up 4.7%.

Let's hope the January Barometer is working too. If it is, we are looking at a good year for US stocks in 2006.

Market analyst Yale Hirsch has compiled extensive data on the barometer. From 1938 up to 2004, Hirsch found, the January direction of the S&P 500 predicted the full-year direction 80.6% of the time.

Over the years, sceptics have scoffed that since January itself was part of the year being measured, it was only natural for it to have some predictive value. How well, the sceptics demanded, did January predict the next 11 months? Other sceptics suggested that other months have just as much predictive power.

Hirsch has responded to the criticisms by posting data for all months on his web site, www. hirschorg. com/jb. For three major stock-market indices, he shows results for the calendar year, 11 months following and 12 months following. Lo and behold, January does have more predictive power than other months. For the 11 months following January, the January direction of the S&P 500 was predictive 73.1% of the time. For 12 months, it was predictive 74.6% of the time.

The next best predictor was April, which forecast subsequent 11-month market action correctly 63.6% of the time, and 12-month action with the same accuracy.

In his writings, Yale Hirsch relates the January Barometer mostly to political events, such as installation of a new Congress and the delivery of the State of the Union add-ress. My own guess is that the barometer has more to do with pensionfund flows. Many corporations put money into the stock market to fund definedcontribution pension plans at the beginning of the year.

In the past five years, the January Barometre has been wrong three times. It falsely predicted an up year in 2001, and incorrectly predicted down years in 2003 and 2005.

Has the barometre lost its magic? My guess is that it is still about 75% accurate.

Now let's look at the equally famous January Effect.

The January Effect is really a confluence of three separate effects: (1) a tendency for the overall market to rise in January; (2) a bias for small stocks to do well; and (3) a propensity for the previous year's losers to bounce back.

In 2005, none of those three effects showed up.

Indeed, the small-stock part of the effect had been dormant for a decade. From 1996 until 2005, the Russell 2000 (a small-stock index) was up four times in January and down six times, for an average net gain of just 0.09%.

This year, small stocks have returned to traditional form and risen vigorously in January. The Russell 2000 ad-vanced 8.6% by the end of January.

Have the previous year's losers bounced back this year? Yes, they have. Nine of the 10 biggest losers in the S&P 500 last year are up in January, led by Applied Micro Circuits, which has gained 27%. The average gain for all 10 of these stocks that were battered in 2005 has been 7.5%.

Another exercise I sometimes do in January is look at the stocks off to the fastest start. I call them the market "hares". Often enough, they have ended up losing to the tortoises. Last year, I suggested investors should "run the other way" from Raser Technologies a Utah-based motor technology firm. It was up 38% at the time, but since has fallen 18%. I said that UniFirst shares seemed "fairly priced or a bit ahead of themselves". The Massachusetts-based maker of uniforms and protective clothing has since seen its shares fall 10%.

I commented that "I wouldn't dream of buying" shares in Harmonic, a California based fibre optic systems provider. The stock has dropped 51%.

This year, the "hare" role is played by three energy stocks - Energy Partners, Tidewater and Superior Energy Services. All three were up 29-30% by the end of January. I like the energy industry. These particular stocks are a bit more expensive than I prefer. I don't think they will tank, but I believe there are better buys around.