January Barometer – Is 2010 Doomed?

Advertisement

 

The market had a pretty bad week last week, as a major support level on the Dow Jones Industrial Average (DJI) was broken and confirmed. All week long, the Dow struggled to maintain the 10,200 level. Then, finally, on Thursday, the Dow closed well below 10,200. It closed down again on Friday, which was technical confirmation of the 10,200 breakdown.

Despite today’s market rally on strong earnings and manufacturing data, last week’s action was important for two reasons. The first one is the “January barometer.” 

The January Barometer: Market Under Pressure?

The January barometer states that, as the S&P 500 (SPX) goes (i.e., performs) in January, so goes the rest of the year. A down January is supposed to indicate a down year ahead for stocks, and this January, the S&P was down 3.3%.

Now, I know what you are thinking, this is one of those stupid indicators that really has no connection to the market, and this is one of those coincidental things. In many cases, this would be true. But when looking back into history and testing this “theory,” you can’t ignore the results.

Since 1950, there have been 20 down Januaries in the S&P. Twelve times the market finished the year down. Seven times the S&P battled back to finish unchanged for the year. Only once in those 20 years did the S&P finish higher after a losing January.

Those numbers are enough to make you take a second look at this. So, I did!

A Confirmation From the Dow

I looked at the same theory, but this time I used the Dow, and I found that the numbers were pretty much the same, especially on the downside. Every time the Dow was down in January, there were only four times it finished up for the year.

Darn thing was right 95% of the time!

You might talk about coincidences, like the supposed “Super Bowl Indicator,” which says the market is almost always up when an AFC team wins the Super Bowl. This may be true; however, there is really no connection between the two. There is no explainable reason for the market to be up when the AFC wins the Super Bowl.

So, when looking at the January barometer, we must find an explanation that indicates some type of logical pattern or relationship that connects the two.

You need to look no further than another January theory called the “January effect.”

>

An ‘Effective’ Indicator?

The January effect says that, in the first week or so in January, the market will be up. This is due to the fact that many people use the week between Christmas and New Year’s to dump their losing positions so that they can get the tax write-off from the trading losses.

After the New Year’s holiday, the positions are bought back into the portfolio. All of this re-buying creates an increase in demand, and the surge propels the market higher in the first week or so in January.

Now, if those who sold out their positions between Christmas and New Year’s decided not to buy those positions in January, then there would probably be no catalyst for the buying in early January that would get the year off to a good start.

You might say that a lack of buying does not necessarily lead to an increase in selling. But, let me tell you from experience, it does!

Where is the Opportunity in All This?

As a trader or investor, we look for patterns in the market, especially recurring ones. In the case of the January effect, we see the market trade up in the first week or so of the year, a very high percentage of the time. There is the recurring pattern, and there is a trading opportunity.

But traders realize that — just as there is potential in the occurrence of a persistent pattern — there is also opportunity in the non-occurrence of that recurring pattern. The absence of this highly regular event should draw questions from those astute traders who notice this non-occurrence.

Why did the January effect not happen? There are many possible reasons, but they all ultimately point to one answer: a lack of confidence in the market’s ability to go up.

What’s an Investor to Do?

So, as a trader, I will come to the conclusion that people did not re-buy, after selling at the end of the previous year’s tax-selling, because they do not have confidence in the market. So I sell. And so do many others.

Now, the rout is on and gaining momentum. The selling begets more selling.

By the time January ends, all of the selling — which started with the lack of buying in the first week or so of January (a no-show of the January effect) — produced a round of selling that took us through the end of the month, creating a losing first month of the year. Now this makes some sense!

>

 

The second topic I want to cover today picks up where the first leaves off.

In order for the selling that starts after the no-show of the January effect to continue through the rest of the month, there needs to be momentum. Just some selling is not going to do it. More than that is necessary to ensure January finishes down for the month.

What we need is some technical help. We need the selling to break some support levels to draw in more sellers — in this case, the technical sellers. Last week, we got exactly that; a confirmed technical breakdown.

The signs of this potential breakdown were glowing. Normally, when the market comes down to a support level, the market bounces up off the support level, hence the term “support.”

At the end of the week before last, the Dow had traded down to its support level of 10,200. After touching the support level, the market did bounce up off of that level, but not with much conviction.

With a lackluster bounce, the market traded back down to the support again. This happened several times until the support level finally broke. But the break of the 10,200 level was not convincing. The level was only broken by a little bit.

Enter the Plunge Protection Team

Three times the Plunge Protection Team (PPT) tried to drive the market up by jumping into the pre-market futures and creating the appearance of a positive opening.

The PPT’s idea was to get some upside momentum and get it supported by the earnings reports due out later.

This seemed to work, but only temporarily.

Each time last week, the market opened up but ended either down or unchanged as the upward jump-start provided by the PPT fizzled by the close. This showed a real weakness in the market, which inevitably, on Thursday, closed convincingly below Dow 10,200.

Knowing that technicians look not only for the violation of support, but also for confirmation, the PPT had one more shot at trying to avert this breakdown.

And, it was important. They already had the January barometer working against them, which would definitely hurt investor confidence going forward. Now, they were looking at a possible breakdown of a very, very strong support level.

That does not bode well for the idea of building the consumer confidence that everyone tells us is so important to consumer spending, which constitutes 70% of the economy.

They tried hard to make a push in the pre-market futures on Friday, which led to a positive opening and a run toward 10,200. It failed in the late morning.

Another run occurred later in the day into the close. But that, too, failed by the bell. The market finished down for the day — a confirmation of the Thursday breakdown.

Things do not look very promising and, if the January barometer is as accurate as it has been in the past, we could be in for a long, ugly year!

Tell us what you think here.  

Related Articles:


5 Surprising Rules for Rebuilding Your Wealth
Investors sitting on big losses are being told to just hunker down and take their lumps … and if they can just be patient and wait another 12 or 24 months, their investments will come back. That’s shameful advice! Once you know the new rules of trading, you’ll see how easy it is to earn double- and triple-digit profits now. Click here to start rebuilding your wealth today. 


Article printed from InvestorPlace Media, https://investorplace.com/2010/02/january-barometer-is-2010-doomed/.

©2024 InvestorPlace Media, LLC