Tags: January Effect | Set | Tone | Rest | 2010 | new year

January Effect Will Set Tone for Rest of 2010

By Sean Hyman   |   Monday, 04 Jan 2010 02:45 PM

Back when I was a stock broker, we always used to watch two things at the first of the year.

The first one was how the first five days of the year did and the other was how the month of January ends up doing.

Why?

It’s because there’s a phenomenon called the “January Effect.”

It’s an indicator that proves true so much, that institutions around the world watch it like a hawk.

In fact, this indicator has only proved wrong five times since 1950.

So while there’s nothing that’s 100 percent, being wrong five times in about sixty years is a pretty darn good track record.

It goes like this ...

Pros watch and see how the first week of stocks goes and then how the remainder of the month of January goes.

That gives us a good “heads up” on how the remainder of the year is likely to turn out overall.

If the first five trading days goes well, it’s likely that the entire month overall will have done well also.

If the entire month does well, historically, so do the market averages.

Now, we can speculate as to why it works. Some say it’s because of a new tax year starting up, etc.

However, I prefer to focus on how well it works and not try to crack the code on necessarily why it works so much of the time.

However, I will say that I think the sentiment among investors gets set fairly early on in a year and if the year starts off really bad in the first 30 days, then they aren’t nearly as likely to plunge in and buy stocks later on either.

By the time January starts to come to a close, investors may have a great idea of how the fourth quarter earnings went.

If they feel they went bad overall, they are likely to not invest a lot of new money into the markets.

However, if they feel that the earnings were much better than analysts and economist expected, then they could dump quite a bit of new dollars into the stock market then, and throughout the remainder of the year.

I’ve been saying for a while that growth would be slow due to the banks not being willing to lend and due to a lack of consumer spending.

I’ve stated that the bulk of the results that we have seen have been from government spending programs.

Well, I happened to hear Federal Reserve Vice Chairman Kohn echo my thoughts on Jan. 3. In his speech, he held the exact same concerns.

He stated that “tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets."

The thing about the Fed is that they get data piped in from all over the country in a fairly “real-time” fashion.

In other words, there’s not much of a delay.

So they tend to have the best picture of how things are really turning out on a huge macro level.

So watch the first five trading days of the year and see how they go.

Then note whether the month of January was an “up month” or not.

That will give you a huge indication about how your portfolio is likely to do over the course of the year.

Now, here’s one more thing that I look to that I think may be of benefit to you as well.

Watch to see how the small cap stocks do.

In particular, pay attention to how the Russell 2000 index performs in relation to the other major indices.

If large institutions are buying up small caps more so than large capitalizations stocks (like the Dow stocks), then it means that they feel the year will be a good one.

After all, the last thing you want to be in if you feel that the year will turn out badly is small cap stocks.

They don’t have near the cash to fight off a recession like large cap stocks do.

However, if times are good, small caps will flourish more because they have much more room to grow than do the large cap stocks that have canvassed the nation so much already.

If stocks perform poorly during the first 30 days of the year, then it’s likely that commodities and commodity related currencies will outperform the stock market.

If commodities do well with the growing inflation that’s coming on, then this could actually widen the profit margins for commodity exporting countries.

As that happens, it would mean that investors would feel more comfortable holding their money in a country’s currency that is benefiting from inflation than one that is being hurt by inflation and struggling stock markets.





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SeanHyman
Back when I was a stock broker, we always used to watch two things at the first of the year. The first one was how the first five days of the year did and the other was how the month of January ends up doing. Why? It s because there s a phenomenon called the January...
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