January effect is a term that many investors will be hearing about in the press this month.
The January effect has a few different components. One is that the stocks of smaller companies have a tendency to outperform in the month of January. Another is that January can be a pretty good month for the market because there can be some selling late in the year primarily for tax purposes.
Once the tax selling is over, these stocks can have a tendency to bounce in the first few days of the New Year.
The so-called January effect has led to another supposed indicator known as the January barometer. The barometer says if the month of January is good for stocks, the rest of the year should follow suit; a down January is supposed to foretell a poor year for stock market returns.
The Stock Trader’s Almanac says that since 1950, the January barometer has about a 75 percent accuracy rate. A recent article in Bloomberg’s studied more than 85 years of data on the S&P 500 and concluded that the returns for the month of January only correlated to the annual returns for the market 0.30 percent of the time, which would make it a pretty poor indicator.
In today’s modern marketplace, where super computers using complex mathematics account for more than 50 percent of the total trading volume, any seasonal anomalies like this are going to be discovered quickly, and once the advantage is discovered and more people try to use it, any statistical edge quickly disappears.
This year so far, the S&P 500 was down the first few days of the year, then soared to a new record at 1850, and since then has sold off a little bit. At the time I’m writing this, the S&P is down about a half percent for the year so far.
Long term investors shouldn’t be making their investment decisions based on things like the January effect or the January barometer. You’ll read about many indicators like this in the press, but you really have to evaluate how often these types of indicators work and what is the best course of action for your individual situation.
It’s important to focus on fundamentals, like interest rates, corporate earnings and monetary policy. With Janet Yellen at the helm of the Fed, watch for continuation of Bernanke’s policies with the QE, or quantitative easing.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.