Wednesday, January 1, 2014

January effect Shmanuary effect!

Tuesday's guest on CNBC's Fast Money program made a case for the first 5 trading days of 2014 being huge for January, and for the trend in January being huge for the balance of the year. According to him, if the S&P 500 is up the first five days, there's an 80+% chance it'll show gains for the month. And if the S&P 500 is up for the month, there's a better than 70% chance the index will end the year higher than where it began. And, believe it or not, this well-known analyst (not in the mood to pick on him by name) was dead serious. Even one of the show's regulars (the show features a small group of traders offering up their stock picks) acknowledged the so-called January effect as a legitimate indicator. Oh my!

Long-time readers know that I'm no big fan of technical analysis. In my mind, shapes drawn by lines tracking some data point matching similar shapes from some number of decades ago says virtually nothing about what the market's going to do in the morning. In fact I just finished a book yesterday, written back in 2009, that featured interviews with a few top strategists. One gentleman, a well-respected analyst, painted an utterly frightening picture of the ensuing 3 - 5 years based on striking similarities between the stock market of the 1930s and that of 2008. He predicted, with conviction, that it would take many years for the market to eclipse the high it reached during the 2009 bounce, let alone the all-time high it recorded in the fall of 2007. Well, as you know, the market has, four years hence, blown by both of those milestones.

Again, I'm no big fan of technical analysis, that said, I do find some of it intriguing. The fact that so many big-money managers strategize with technicals makes me interested in the most-used schemes. While maybe I can't get my brain around how so many brainiacs find value in shapes that were drawn at, in my 1930s example, times when the then players are now dead, the fact that they can is something I should pay attention to. Regardless of why they may think that when a security drops below its 200-day moving average it's time to sell, if they all sell, their prophecy becomes self-fulfilling.

I'm not suggesting that we're about to change course and abandon the fundamental basis from which we make our investment recommendations---not even close---however, as this bull market moves on we will be assessing some of the technicals underlying the various positions we hold as we meander into the future. The widely-used ones could matter simply because they're widely-used. Although, I promise, the "January effect" is not one we'll be paying attention to...

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