The January Effect, like its equally annoying cousin, the
Santa Claus Effect, is another delightful phrase to remind us all to continue
buying every equity that isn't nailed down.
So let's look at this current January to see how things are
progressing. First, buyers are supposed
to take advantage of lower December prices.
Check. Second, small cap stocks
are supposed to outperform in this environment.
Check. Third, the effect is
supposed to be strongest in the third year of a President's term (2011). Check.
I'd like to examine the last two Januaries to try and give some guidance
as to how this winter season will play out.
As usual, I'll be presenting charts with numbers, and as always, the
numbers are just markers for my points, not waves.
The third year of the President's term gave us a January
Effect that was already well underway.
1. The November high just
slightly exceeded the high for the year.
2. Consolidation to give bears
hope for an end of the year selloff.
3. Break to new highs. 4. An uninterrupted,
three month grind straight higher that absolutely blew the doors off the prior
This is the January Effect that has a scary resemblance to
what we are currently seeing in 2013 and I think will have a tremendous
influence on how the markets behave for the next few months. 1. The
classic November high (yes, I realize it was the last week of October). 2.
Hard drop to give bears hope for a dismal end of the year. 3. Rip
roaring rally off the lows that STOPS SHORT OF THE PRIOR HIGH. 4. Drop
to again give bears hope. 5. RALLY BACK TO THE PRIOR HIGH. 6.
Three month long grind higher; the same type of grind as 2011.
So far, 2013 is almost exactly mirroring the pattern the
market mapped out in 2012. 1. Significant high. 2.
Hard drop. 3. Rip roaring rally off the lows that STOPS
SHORT OF THE PRIOR HIGH. 4. Drop to again give bears hope. 5.
RALLY BACK TO THE PRIOR HIGH.
6. Three month long grind higher?
There are two other extraneous factors that make the prior
two years eerily similar to 2013. First,
the VIX was already at significantly depressed levels relative to the prior
year's levels meaning the rally occurred in a state of no fear. Second, RSI readings were already mildly
overbought in the 60's area before the market ripped higher meaning momentum
was at a controlled boil. 2013 is
showing identical readings. My
conclusion is that if it looks, acts, talks, and quacks like the January
Effect….it probably is. One beacon of
light for the bears though. 2010 had the
same pattern, the same break out, and instead had a significant failure
down. But this sure looks like 2011 and
2012 all over again.