Traders on Wall Street are a superstitious bunch. And their superstitious nature has given the investing community a handful of great sayings, indicators and rules of thumb over the years…
Many of you are likely already familiar with the old stock market adage of “Sell in May, and go away.”
The idea here is that traders should sell stocks in May to avoid a seasonal decline in the market in the middle of the year.
There’s also the “Super Bowl Indicator.”
It says that if an NFL team from the American Football Conference (AFC) wins the Super Bowl, the market is more likely to decline over the following year. And if an NFL team from the National Football Conference (NFC) wins, the market is more likely to rise over the following year.
Unfortunately, these particular rules of thumb just aren’t that reliable…
But there is one stock market phenomenon that could actually provide some valid insight into the market’s direction this month: The January Effect
As John Jagerson and Wade Hansen noted in their latest Strategic Trader update…
As we head into the new year, another round of articles and pundits referencing the “January Effect” are due. The short of it is that, since first being noticed in 1942, January had a reputation for being a good month in which to own stocks, particularly small-caps.
A study of the so-called January Effect looking at data from 1904 to 1974 concluded that the average return for stocks during the first month of the year was five times greater than any other month. From 1972 through 2008, the data still showed an edge for stock performance in January.
Years Avg. Gain 1904-1951 2% 1952-1974 0.3% 1974-2008 1.4% 2008-2018 -1.2
John and Wade note, however, that the phenomenon has not been as reliable since the financial crisis. But really, the question isn’t whether the market has rallied in January in the past, but why did that happen?
And, more importantly, do the circumstances look right for it to happen again? Here is their response…
Like these other stock market superstitions, the January Effect stems from an attempt to explain the above-average January returns in prior years. For example, reasons might include additional investor cash flow from year-end bonuses along with an increase in buying activity after tax-loss selling each December.
Traders are creative about strategically choosing which shares to sell in order to maximize their tax benefit. Near the end of the year, it is common to sell losers in order to offset gains in other positions or create a carry-over benefit.
This process of “tax-loss harvesting” is more effective in years when the market has been choppy rather than trending, which means there are both losing and winning positions in a portfolio that can be used to offset each other.
However, just because a trader sells late in the year in order to recognize that loss doesn’t mean that they don’t want to have exposure to that same stock in the next year.
If some of the otherwise fundamentally sound stocks that were sold off in October through December start to rally before the broader market does, it could be an early indicator that stocks will make a move to the upside this month.
This would indicate that investors are reallocating their capital back into positions about which they are still optimistic.
The conditions certainly seem right. The market experienced extreme volatility in the last three months of 2018, but the economy overall has been very strong, including job growth and wages.
So far, in 2019 the S&P is up a little over 3%. The earnings reports for the fourth quarter of 2018 start in earnest next week, so we could see a rally if the reports are good.
To get more of this analysis from John and Wade, click here.
***Tesla Worth Another Look
Tesla announced Sunday that they had broken ground on its first gigafactory outside the U.S. – in Shanghai.
Tesla founder Elon Must tweeted out the news and followed it up with news that the company was aiming to finish initial construction this summer and start production on Model 3 vehicles by the end of the year.
Importantly, the plant will be wholly-owned by Tesla, the first such wholly-foreign-owned auto plant in China. Owning its own plant in China will allow Tesla to sell into the world’s biggest electric car market more easily and bypass higher import tariffs if the trade war goes sour.
Delivery of the Model S for China is expected to begin in March of 2020. Investors and analysts will be watching this closely as the company has struggled to meet projected production numbers.
This morning, new Tesla board member, and Oracle founder, Larry Ellison revealed that his investment in the company topped $1 billion. Ellison was added to the board as part of settlement with SEC regulators who wanted more oversight of Musk.
I’ve written before about Tesla and Musk, mostly to warn people to be cautious. They’ve lost a ton of senior managers and Elon Musk’s now infamous “funding secured” tweet cost the company $20 million in penalties and caused the company a lot of headaches. And there are still many advisers who would not recommend the stock.
But these latest bits of news prompted me to take a look at Tesla’s recent performance, and there is no denying the company’s current momentum.
In Q3 Tesla’s financials showed that they had turned profitable, generating $774 million. This after many quarters of burning cash.
As you can see from the chart below, during the last three months, TSLA has been immune to the broader S&P stock plunge and outperformed other tech giants such as Apple and Facebook.
Last Wednesday, the company announced that it delivered 90,700 vehicles in Q4, which was an all-time high and 8% higher than Q3. Unfortunately, those numbers fell below Wall Street excitations and lead to a sell off.
But European expansion is just around the corner, as the Tesla Model 3 vehicles are set to be delivered there in the second half of 2019. And Tesla already sells three of the top 4 electric vehicles in the United States (the Prius being the other).
I’m not a Tesla bull yet, but I’m anxious to see what the new board members do to stabilize management and help the company meet production targets.
Elon Musk is a visionary and no one can say what he will do next. But as the electric vehicle market continues to grow, production and revenue are definitely trending the right way for Tesla making it a stock worth watching.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com