Buy, Sell or Hold Heading Into the New Year?

by Sam Collins | December 30, 2013 7:44 am

Buy, Sell or Hold Heading Into the New Year?

On Friday, the major indices slipped to small losses ending the Dow’s six-day winning streak, the longest since March. But the losses were small and trading volume was light because of the holidays.

There were no major releases of economic data and no major corporate events except for the decline of Twitter’s (TWTR[1]) common stock price. The social media stock plummeted 13% on what the media termed “profit-taking.” The stock went public early in November and nearly tripled before Friday’s sell-off.

The only other news of mention was the move in interest rates as the yield on the 10-year Treasury bond closed above 3%, the highest since July 2011. Mortgage rates were reported to be at around 2.75%.

At Friday’s close, the Dow Jones Industrial Average fell 1 point to 16,478, the S&P 500 also closed down a point at 1,841, and the Nasdaq lost 11 points at 4,157. The NYSE primary market volume was 423 million shares with total volume of 2 billion shares, while the Nasdaq traded total volume of 1.2 billion shares. There were slightly more advancers than decliners on the Big Board, but on the Nasdaq, decliners were slightly ahead.

For the week, the Dow rose 1.59%, the S&P 500 gained 1.27%, and the Nasdaq advanced 1.26%.

12 30 13 dji 300x193 Buy, Sell or Hold Heading Into the New Year?
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12 30 13 nasdaq 300x194 Buy, Sell or Hold Heading Into the New Year?
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The term “January Effect” generally means the investment period of mid-December to the end of February. It accepts as historically accurate the theory that there is a positive impact from not only investing in this period, but investing in small-cap stocks versus large-cap stocks.

The thinking behind the theory is that at the end of the year institutions “play it safe” and invest in solid blue chips so that their portfolios shine with quality at the end of the year. However, as the theory goes, in January, they are willing to take a greater risk and “go for the fences,” since they have the entire year to make up for any early mistakes.

Since we have almost completed December and investors are wondering if they should buy, sell, or hold in the new year, I thought it worthwhile to compare January’s performance for the past three years. Why just the last three years? Because there was little doubt by this writer that we were in a bull market during the entire period and that we are still in a bull market.

Every January for the past three years has resulted in a gain for big caps, represented by the Dow Jones Industrial Average, and small caps, represented by the Nasdaq (even though there are many mid-cap names in the Nasdaq).

The Dow’s gains got progressively better, rising from 2.1% in 2011 to 3.6% in 2012, and finally, 7.4% in 2013. That’s a total gain of 13.1%.

The Nasdaq’s gains were more volatile, starting at 1.3% in 2011, then 8.1% in 2012, and finally, 6.4% in 2013. The Nasdaq’s total gain was 15.8%, outscoring the Dow by 2.7 points.

Conclusion: Interestingly, this rough micro study indicates that the results may confirm the theory. But December was a terrific month for both the Nasdaq and the Dow, each up 2.4%, so there may be some profit-taking late in January.

However, the first two weeks are renowned for heavy institutional investing, so staying with current positions and buying small- and mid-cap stocks is, I believe, a solid approach that is also supported by a strong economic data.

Durable goods orders are up, a leading indicator of manufacturing activity. New home sales for November were better than expected, and last week’s initial unemployment claims fell sharply.

We will continue to ride the bull into 2014.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

Endnotes:
  1. TWTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWTR
  2. click here: http://www.bloomberg.com/apps/ecal?c=US
  3. click here: http://www.bloomberg.com/markets/economic-calendar/

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