January and its Effects - Projection for the Year

We have all heard the old market adage, "As January Goes, So Goes the Year". But for those who haven't heard, there is another saying that goes something like, " As the First Five Days of January Goes, So Goes January, and So Goes the Year." Well, we have just finished the first five days of January 2011, so we thought we would take a look at how things fared in the equity market for these first five days, and how this barometer has worked historically.

According to the Stock Trader's Almanac, the last 38 up "First Five Days" periods were followed by full-year gains 33 times, for an 86.84% accuracy ratio; and the average gain for these 38 years is just under +14%. Of the five years that didn't "work", four related to war, and one (1994) produced a flat year. The year 2002 was the last one that failed to be properly predictive, as January started the year up +1.1%, but ended nastily with a loss of -23.4%. For those first five days of January that start off in negative territory, which have been 23 in all, they have been followed with 12 up years and 11 down years. As a sidebar, the last two years have been winners, in that the first five days showed a gain, as did the entire year.

In pre-presidential election years (of which we are in now), this indicator has a stellar record. In the last 15 pre-presidential election years, twelve full years followed the direction of the "First Five Days". Realize that the January Barometer (the direction for the whole month), has an even better track record, with 14 of the last 15 full years having followed January's direction.

Now for the good news: the "First Five Days" of January 2011, a pre-election year, have notched a gain. The S&P 500 [SPX] ended the year at 1257.64 and closed out the week at 1271.50, for a gain of +1.10%. Now let's watch to see how the entire month plays out.

January and its Effects - Style Rotation - Small Cap Outperformance

The January Effect ... In December

• The S&P 600 Small Cap Index [SML] has outperformed the S&P 500 Large Cap Index [SPX] in material fashion thus far in 2010, by a score of +22% to +10%, respectively, in fact. (Data thru 12/8/10)
• Traditionally, the period of time from late-September to Mid-December offers outperformance from Large Cap stocks, a generality that has failed to show itself in 2010. Since September 30th, the S&P 600 [SML] has gained 13%, versus the 8% gain in SPX.
• Conversely, the period of time from mid-December until March of the following year encompasses one of the strongest examples of style rotation within the market. Historically this phenomenon was referred to as the "January Effect," despite the fact that it is truly observed to begin by mid-December. Nonetheless, the "January Effect" refers to the dynamic performance of Small Cap stocks that often begins around this time of year.
• According to Stock Trader's Almanac, which uses a comparison of the Russell 1000 Large Cap Index [RUI] vs. Russell 2000 Small Cap Index [RUT] to make their point, the following average rates of return have existed since 1979:
  31-Yr Average Rates of Return (Dec. 1979 - Feb. 2010)

  12/15 - 12/31
  RUI: 1.6%
  RUT: 3.1%
  

  12/15 - 2/28
  RUI: 2.5%
  RUT: 5.7%
  

  Notice both that Small Caps, on average, double the return of Large Caps from mid-December until the end of February, and that the trend is already well underway by the time January rolls around. To put the margin of outperformance into perspective, just the spread between Small and Large cap Indexes accounts for a return of nearly 20% on an annualized basis, clearly well above the long-term average annual unhedged returns for the market.

  Source: Stock Traders Almanac 2011, pg. 102

Choppy Trendless Markets

How is a choppy trendless market defined? What are its characteristics? How much of the time has this condition prevailed in the past? What are good strategies to use in a choppy trendless market? How can you tell when you're entering one?

These are all questions I aim to answer in this article.

DWA Learning Curve 2011, Part 1

This will contain my active investment journal for 2011. It will chronicle how I put $500,000 to use in the financial markets.

Background.