Tuesday, January 3, 2012

Keystone's January Seasonality

January begins and the New Year's resolutions are long forgotten. The year always starts out with chatter concerning the January Barometer, January Effect and other rules of thumb.  The January Effect is where small caps tend to have large gains between mid-December and during January of each year. So try to avoid shorting small caps in this area. The January Barometer is correct two-thirds of the time and it says that whichever way January goes, so goes the markets. Other traders follow the adage that the way the first five days trade are the way that January will trade, and thus the year.  All you dizzy yet?

Further, on the first day of trading, if the day is up, as today, the first day of 2012 was, then the markets are up about 80% of the time for the year. If today would have been down, the forecast is a coin flip. An interesting tidbit on a piece of scratch paper deep in Keystone's archives says that, hold on a second while the dust is blown from the surface of these ancient scrolls; if the move on the first day of trading is over 1% up or more than 1% down, the markets tend to finish the year in exact correlation to this percentage. Thus, the SPX was up 1.6% today so this says the year will finish with the markets up about a percent and a half.

Shipbuilders like to move up in February and FDX and UPS typically follow after that so January is the time to watch and poke around this area. Keystone already cashed in on the positive divergence NAT trade as one of the first trades of the year today. The shipbuilding sector also greatly effects the KOSPI. Technology tends to top at the beginning of the year, the Q4 tech party quarter is history. Beef typically rallies from now into mid-April and this is of particular interest this year due to the droughts. Much of the beef cattle were sent to slaughter since grazing lands were inadequate to support the herds. This provided pockets of price relief last year but this year the Piper will have to be paid. TSN would be worth studying. Ask your grocer jokingly if you can pay for your meat on an installment plan.

Energy typically bottoms in January-February. There is a large chip conference in early January so watch the SOX and SMH, as well as all the other individual semiconductor stocks.  A JPM Helathcare also typically occurs in January so the healthcare stocks are in play. There is also an ETF Conference that typically occurs in January each year.  The dollar tends to be strong at the start of the year.

The markets are typically up 0.9% in January.  January is typically the top month for the Nasdaq.  January is the fifth best month fo the year for the SPX and the sixth best month of the year for the Dow Industrials. The best January was 1976 up 14% and worst January was 2009 down 9% (right before QE1). January tends to account for about 25% of the yearly move of the major indexes. January kicks off the Q1 earnings period which typically returns 2.1% (January thru March).

2 comments:

  1. so what you're saying is that odd are, the market rallies in Jan - therefore, its dangerous and almost naive to short the market as a WHOLE during the start of a new year?

    ReplyDelete
  2. Hello Omar. Nope, you should never use seasonality as a decision-maker concerning trading. Think of it as more of a background current gently pushing the trading waters one way or the other. After one day of trading, however, seasonality does hint that January should be up and also the entire year, but it is not worth hanging a hat on. Caution is required in these markets.

    Seasonality factors are based on averages, so the idea is to use the higher probability in your favor. Thus, the seasonality factors are great to know, but they are only one tool in a huge tool box. Also, traders never are 'whole' anything, it is best to be constantly hedged long and short.

    Good luck, we will find out in a year how the January seasonality plays out.

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