Sunday, January 5, 2014

Keystone's January Seasonality Factors for Trading the Markets

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 typically, shorting small caps is avoided during this period, however, these are not your Grandfather's markets due to the obscene money printing by the Fed. For January 2014, the RUT Russell 2000 Small Cap Index is far overextended and negatively diverged on the weekly chart wanting to see a spank down for small caps. The RUT monthly chart, however, will likely want to see price come back up for one more matching high after the pull back. The anticipation is that the broad indexes are printing a significant top in the first half of 2014 a la the 2000 and 2007 market tops. 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.

Further, on the first day of trading, if the day is up, then the markets are up about 80% of the time for the month of January and then up about 80% of the time for the entire year. If the first day of trading is down, the forecast is a coin flip. January 2013 was a very positive month that led to the big gains for the year. The first day of the year for 2014 is met with selling and the first week of trading will finish on Wednesday, 1/8/14, so after the closing bell mid-week, check to see what the January Barometer is forecasting for 2014. 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 for longs. The shipbuilding sector also greatly effects the KOSPI. The shipbuilders and shippers are all up dramatically in the back half of 2013 due to the Fed and BOJ intervention so be skeptical of this seasonality for 2014.

Technology tends to top at the beginning of the year; the Q4 tech party quarter is over, and Q1 begins. Tech was up for all of 2013 with the big Q4 finish that would be expected, so be cautious with technology moving forward. There is a large chip conference in early January so watch the SOX and SMH, as well as all the individual semiconductor stocks. Beef typically rallies from now into mid-April. Energy typically bottoms in January-February and Q1 is very good for energy stocks, simply look at 2012 and 2013, very robust moves for energy. However, to continue the theme above, the Fed intervention has destroyed all price discovery in markets so the positive energy seasonality this year should be taken with a grain of salt. The XLE weekly chart is negatively diverged across all indicators actually indicating a weak January in conflict with the expected positive energy seasonality. A JPM Healthcare Conference 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 U.S. dollar tends to be strong at the start of the year and this is the case with the dollar ($USD) so far in 2014 bouncing from 80 to 81, +1.3%. A higher dollar will hurt commodities.

The markets are typically up 0.9% in January.  January is typically the top month for the Nasdaq.  January is the fifth best month for 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 the Fed created a stock market bottom with 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). If the first day of trading for the year is either down -1%, or up +1%, the markets will typically finish the year in this same direction. For this year, the SPX, Dow and Nasdaq all dumped about -0.9%, and the RUT fell -1.1%, on the first trading day of the year, 1/2/14. Very interesting.

New money comes into the market the first few days of each month and especially for the new quarters and the start of the year. Thus, the bulls have an advantage each year as January begins. A new moon occurred 1/1/14 and markets are typically weak moving through the new moon, which happened as would be expected. A full moon occurs on 1/15/14 and markets are typically bullish through the full moon. The next new moon is 1/30/14. New Fed Chair Yellen will be confirmed on Monday, 1/6/14. Markets are closed on Martin Luther King Day, Monday, 1/20/14. Equities are typically bullish moving into a three-day holiday weekend so some market buoyancy may be expected on 1/16/14 and 1/17/14.  OpEx is 1/17/14 and is usually an up day. OpEx Friday in January has been up 10 of the last 14 years. During OpEx week, a Tuesday low typically leads to a Wednesday high (1/14/14 to 1/15/14), thus, the bulls have an attractive seasonality set-up from 1/14/14 through 1/17/14. The FOMC two-day meeting is on 1/28/14 and 1/29/14, Chairman Bernanke's final meeting, then Chair Yellen takes over the controls. The last two days of the month tend to be weak and usually fall about -0.4%. Interestingly, these factors provide the bears an advantage to end the month after the FOMC meeting.

Other notable dates this month are the ECB Rate Decision and Press Conference and AA kicking off Q4 earning season on Thursday, 1/9/14, the Monthly Jobs Report on Friday, 1/10/14, Retail Sales on 1/14/14, Housing Starts and Consumer Sentiment on Friday 1/17/14, the BOJ central banker meeting on 1/22/14, Consumer Confidence and President Obama's State of the Union address on 1/28/14 and Consumer Sentiment, EOM and China's Year of the Horse New Year's celebrations 1/31/14. Congress is back in session this week which is a negative for markets. 

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