The January Effect

The old Wall Street saying "As January goes so goes the year."

At the last 30 years when the SP500 closed up for the month of January then 90% of the time it remain positive for the remainder of the year.

2007, 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1993, 1991, 1989, 1988, 1987, 1986, 1985, 1983, 1980, 1979, 1976, 1975, 1972, 1971, 1967, 1966, 1965, 1964, 1963, 1961.

Only three cases where this effect failed and closed down for the year.
2001, 1994, 1966

When SP500 closed down for the month of January it doesn't necessary mean the rest of the year will be down. But since 1930 it usually does predict medium term weakness for the coming months.

In majority of cases, the SP500 closed lower within 1 to 3 months.
2009, 2008, 2005, 2003, 2002, 2000, 1992, 1984, 1984, 1982, 1978, 1977, 1974, 1973, 1970, 1969, 1968, 1962, 1960, 1957, 1953, 1948, 1941, 1939, 1935, 1932.

In rare cases it took a little longer before the SP500 made another monthly low.
1990, 1981 in 7 months. 1956 in 13 months. 1940 in 4 months.

Note that in 2009 the SP500 closed down for January and made a final low in March. Finally in my first post I have my medium term forecast for stock market weakness for the 1st half of this year. With the January Effect also hinting weakness (since the SP500 closed down for January) this reinforces my medium term forecast. Nonetheless, my short term forecast is for a rally.

Short Term Alert: Looking for a rally soon

In my first post I stated that the stock market could get a sharp sell off if it wasn't able to move above last Friday's highs before this week was over. Looks like the stock market decided to be early with selling on Thursday. I also stated that if this sell off should occur then I am looking a better short term rally to start after the sell off.

Below the charts of the Nasdaq and SP500 where both are sold off on Thursday.


In my first post I stated that January 2010 seems to resemble that of January 2004. If this continues to occur then compare the early February 2004 charts below with the current charts above. There was an one day sell off before a decent 5 day rally back higher. I believe the resemblance hints the stock market will get about a 5 day rally in the coming week.

Final note, 'relative strength' refers to one entity being relatively stronger or weaker than another. In looking at the 2004 charts the more speculative technology heavy Nasdaq is showing weaker price action than the SP500. So the medium term down trend for the coming months will mean much more weakness for the Nasdaq than the SP500.

Use of 200 day moving average as a 'mean aversion' trend reversal

The 200 day moving average (200dma) is the average price of the last 200 trading days. When used on major indexes rarely does the 200dma goes beyond 12 months without touching the current price again. In most cases, the 200dma touches the current price within 6 to 9 months or less. When it doesn't and goes beyond 9 months then there should be 'rubber band' effect where the 'reversion to the mean' back to the 200dma should occur within months.

The above chart is of the Gold and it last touched (or came very close to) its 200dma (the blue line) back in April 2009. As in the cases of the 2006 and 2008 highs, by around the 9th month since the 200dma was last touched, the prices peaked and fell back to touch the 200dma within the 12th month time frame. So in one of my trades, I am expecting current gold prices to fall about 10% which is close to where the rising 200dma is currently at.

Using this method on other major indexes we can see that the Nasdaq, SP500, and the Shanghai indexes are due to touch their 200dma either very soon or around summer time. What this means if one had been bullish on the stock markets then it's either time to do some selling and/or to hold back buying/adding until the 'mean aversion' has played itself out.

Note that the Nasdaq (late 1998 to early 2000) and Shanghai (2006 to 2008) indexes went way beyond 12 months in the charts above. No doubt these marked major bubbles.

Conversely, the 'mean aversion' of the 200dma can be used to anticipate important bottoms. Notice that the Nasdaq and SP500 (March 2009) and Shanghai (November 2008) bottomed and rallied back up to touched their 200dma again within the 12 month time frame.

This trading method using the 200dma can be used to help gauge whether a long momentum trend up or down is about to reverse or it will continue on.

2009 to date thus far resembles that of 2003 to date

So far the huge rally of 2009 has resembled that of 2003. Now the first month of January 2010 seems to continue to resemble that of January 2004.

Short term: Very oversold so a short term bounce is expected (and as I'm writing it is occurring.) But the stock market is still very risky to the downside for the short term. If the Nasdaq/SP500 can't rally back intraday above their last Friday highs (2262/1115) by the end of this week Jan. 29th then there's a possibility of the Nasdaq/SP500 will drop over +1% below last Friday's low (2200/1091) first before we get a more constructive short term rally back higher.

Medium term: The highs of early January has very likely marked a medium term TOP for the stock market. We are now in a medium term downtrend for the 1st half of 2010. The current correction thus far is about half way over. So the pain down is half way done. The stock market will get some short term moves up and down, but I expect it to be much lower several months from now.