Negative January Effect. Real or Mumbo Jumbo?

Last week BTIG's Dan Greenhaus tried to dismiss the talk of the January effect (calm investors) stating “Normal corrections” tend to be anywhere from 5-8%, which is basically what we had/are having. If that’s the case, and our underlying fundamental views have not shifted (they have not), then stepping into markets down more than 5% should prove rewarding over time.  Of course me, being a skeptic of MSM (and everything out there for that matter), caught the last two words "over time" and raised an eyebrow.  Seriously?  Over time?  Most small investors won't risk more than 10% of any position.  Many only $100 if possible and this prompted me to poke around a little further on this January effect *thang*

The Street seems to buy the theory "When the first five trading days of the new year are positive, the month of January ends positive 76% of the time. When the month of January is positive to start the year, the stock market finishes the year positive 82% of the time."   While Barry Ritholtz is clearly more skeptical Lots of analysts, including Ed Yardeni, note the data is statistically significant. But whether it should affect your strategy is an entirely different question. My conclusion is that it shouldn’t....."

There's the nuance again "affect your strategy".   Of course we still want to be long in our 401k and IRA accounts Barry but come on.........we'd prefer to have some hedges if we're in for more pain.  Not just sit and wait it out.  We know how well that worked out in 2001 and 2008.  Big funds can afford to "wait it out" and have huge draw downs while fully hedged with Puts but us little guys...........were all but wiped out.

My strategy?  Buy low and sell high so at this point I'm still curious about this January barometer.

Historically how has it performed?  I don't mean since 1990...........but going way back; say to 1950.  Enter the market historian, StockTradersAlmanac.

Historic work like this blows me away. (click on image to enlarge)  Not only did they determine that a negative January had a 80% effective rate of forecasting full year returns, but if Dow took out the December low AND closed negative in January, the forecast jumped to an 88% accuracy rate.  Now that's the sh**

The "why" could be any number of things.  Currency changes causing funds to liquidate some holdings to meet margin calls.  Fears over BRIC stability (which come and go).   Fear of Fed tapering, economic data, bad retail sales (blame the weather!), spike in natural gas possibly hitting balance sheets and triggering a recession or maybe the five-year bull run simply needs a breather.  As Art Cashin pointed out, bull markets tend to have a five-year shelf life and we're dangerously close.  Throw a dart and take your pick but it doesn't much matter to me.

I'm personally placing more weight into historical performance and 88% accuracy is pretty damn impressive if you ask me.  Go ahead and back fill S&P.  Test that 50day SMA and even the highs.   I'll be waiting and placing more hedges, expecting another leg down.  If they're right, my portfolio will be somewhat protected.  If they're wrong, I'll still sleep better at night and at my age.......that's tough to come by.

Full disclosure:  My port is heavily long with a few hedges.  I am looking to protect those longs (unless stopped out on those recently added).

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