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.
2011
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
high.
