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Definition: Barometer Stock
Barometer stock means a security whose performance is said to be an indicator of performance of a particular industry or a sector, or the market in whole. It acts like a gauge for the overall sector or market. In the short term, to predict the future direction of an industry, analysts generally look to barometer stocks. Barometer stock is a British term. It is also referred as a bellwether stock in US.
They are generally the large-cap equities or respected blue chip stocks which signal a bullish market in favorable periods and during a period of an unfavorable performance, they signal a bearish market. Many different sorts of securities can be sorted as barometers; but In US, the rail stocks & shipping have historically been the good indicators for their economy and so they are considered to be the good bellwethers. Barometer stocks can largely influence the economy of a country. Market analysts generally say one thing "What is good for barometer stock is good for the country."
Example: Dow Jones Industrial Average – it is the best known index of stocks in US. A price-weighted average of thirty actively traded blue-chip stocks, mainly industrials stocks including stocks which trade on the NYSE. So, the Dow, as it is named, is a barometer of the performance of the shares of the largest companies in the US.
The January Barometer stock theory is a theory which states that the variation in the S&P 500 during January month sets the stock market’s future direction for the year, as evaluated by S&P 500. The January Barometer tells us that if S&P 500 is up at Jan end compared with its initial position at the start of the month, participants may expect the stock market to increase during the remaining year.