Weekly Perspectives: The January Effect

Weekly Market Outlook For December 30 – January 3, 2020 – Goodbye 2019, Hello 2020!
December 28, 2019
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Hi traders,

Here is your weekly newsletter — perspectives on trading and financial markets.

Click here for last week’s edition.

 

Goodbye 2019, Hello 2020! –

This past week the bullish narrative continued to drive the markets higher and with only 2 trading days left in the calendar year, it looks like we’ll be closing out the year near the all-time highs.

As I’ve been stating over the past couple of months the SPY, DIA, and QQQ are all trading “momentum and up” on the monthly charts so until the momentum is extinguished – short at your peril.

Remember the saying, “being early is the same as being wrong”.  


 

In this week’s video, I examine the major US indices to see how far this rally can go as well as examine one of my favorite market internals indicators to see if and when we can expect a reversal.  

Watch this week’s Weekly Outlook video to see the setups and levels we’ll be watching as well as the technical outlook for the VXX SPY QQQ IWM DIA EEM TSX TLT GLD BTCUSD ETHUSD EEM and more for the week of Weekly Market Outlook For – December 30 – January 3, 2020.

 

The January Effect –

Speaking of January, anyone who has traded or invested for any significant period of time has probably noticed that markets tend to outperform in the month of January.

In fact, this phenomenon is so well known that it has been labeled the January Effect.  

So what’s the cause of the January effect?

Well, the most widely accepted theory attributes the rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off. 

However as Tim Richards wrote a decade ago in Rock On, January Effect, the possibility that there’s a link between the calendar and stock market performance may be real by why exactly it occurs is on shaky ground.  

Jacobson and Marquering while agreeing that there is a strong seasonal effect don’t find any conclusive evidence that this is down to weather or SAD. Indeed, they suggest that applying a simple rule – “Sell in May and Go Away”, or the Halloween Effect – start buying at the end of November, works just as well. Roughly, they conclude, there is some case to answer but we don’t really know how to do it.

Looking at the January Effect, Haug and Hirschey come to virtually the same conclusion. The effect is real but the main explanation offered – that this is something to do with investors selling in December and then buying in January due to the end of the tax year doesn’t hold up – not least because the January Effect is observable outside of the USA, in countries with different tax years.

So at the end of the day – enjoy the effect but be careful not to misattribute the correlation for causation.   

In closing, as the year and decade come to an end I just want to express my thanks and gratitude to everyone who attends the Meetups, tunes into these newsletters, and videos.

Happy New Year to you and your family and here’s to a meaningful and prosperous 2020!

Weekly Perspectives: The January Effect

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