"Never buy at the bottom, and always sell too soon." - Jesse LivermoreThe stock market seems to be limping towards the finish line. Thursday was the fourth-straight down day for the S&P 500. We've nearly given back one month's worth of gains in the last four days. This was the worst four-day Christmas stretch in at least 60 years. Still, the market has had a good year, and the indexes are well above where they were six weeks ago.
This is typically a slow, yet exciting, time of the year for us. A fresh start in 2013 to show this market what we're made of. Coming up in a few days starts the month of January, a very powerful and predictive period. Appropriately named after Janus, the God of the Doorway, the results for this month could lead to conclusions about the rest of 2013. There is definitely some validity to January's effects as well as some confusion. For example, the January Barometer and the January Effect are two completely different things. I'd bet that plenty will get this one wrong over the next few weeks. So let's get right into it, and let me explain what the month of January means to me:The January Barometer -- As the S&P 500 Goes in January, So Goes The Year. When the month of January records a gain, as measured by the S&P 500 Index, history suggests that the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an incredible 88.7% accuracy ratio. This number also includes 2012, as January closed the month up 4.35% and the S&P500 is on pace to finish positive for the year. Down Januarys Serve as a Warning -- According to the Stock Trader's Almanac, every down January for the S&P 500 since 1950, without exception, preceded a new or extended bear market, flat market, or a 10% correction. 12 bear markets began, and ten continued into second years with poor Januarys. When the first month of the year has been down, the rest of the year followed with an average loss of 13.9%. In most years, these declines later provided excellent buying opportunities. For example, 2008 was the worst January on record and preceded the worst bear market since the Great Depression. But 2009 proved to be one of the greatest buying opportunities in American history. First Five Days in January Indicator -- This one has a very nice track record as well. The last 40 UP first-five-days-of-the-year have been followed by full-year gains 34 times for an 85% accuracy ratio. This includes 2012 which had a 1.8% rally in the first 5 days. The average gain for the first 39 of those years was 13.6%. It looks like 2012 will close up somewhere right around that number as well. The results are less reliable when the first 5 days in January are negative, showing just a 47.8% accuracy rate and an average gain of 0.2%. Going forward, I think it's important to note that the S&P 500 posted a gain for the first 5 days of the year in just 6 of the last 15 post-election years. The January Barometer Portfolio -- The Standard & Poors top-performing industries in January tend to outperform the S&P500 over the next 12 months. According to Sam Stovall, if on Feb. 1 you invested equally in the 3 sectors that posted the best returns in the month of January and held them until Feb. 1 of the following year, you would've received a compound rate of growth of 8% as compared with 6.6% for the S&P 500. If you bought the worst performers in January, you would've underperformed the market with a 5.5% return. Since 1970, the compound rate of growth for the 10 best-performing sub-industries based on their January performance was 14.4% as compared with 6.8% for the S&P 500, and 4% for the worst 10 sub-industries in the S&P 500 in that January. The best-performing sub-industries in January went on to beat the market in the subsequent months 69% of the time, so nearly 7 out of every 10 years. The worst performing groups outperformed the S&P only 38% of the time. This indicates to us that you're better off sticking with the winners rather than the losers. The January Effect -- As we mentioned in our December 6th Post, "It's Game Time for Small-Caps", there is a tendency for small-cap stocks to outperform large-caps in the month of January. There are plenty of theories about why this is the case, but as a lot of us already know, this phenomenon now begins in mid-December. The stats don't lie: from 1953 to 1995, small-caps outperformed large-caps in January 40 out of 43 years. But the shift into the mid-December starting point really got going after the 1987 crash. This year, however, the Russell 2000 actually began outperforming the Larger-Cap Russell 1000 in mid-November. So the results here should be interesting to look back on. January is the NASDAQ's Top Performing Month -- Since 1971, the total percentage gain for the Nasdaq Composite in January is an unbelievable 115.2%. If you take the rest of the 11 months combined during that period, the rest of the year has averaged just 30.1% (1971-2011). 2012 was no different as the Nasdaq Composite gained 8% for the month of January and is up just about 6.6% since then.
Garbage time, also known as "junk time", is a term used to refer to the period at the end of a timed sporting event that has become a blowout when the outcome of the game has already been decided, and the coaches of one or both teams will decide to replace their best players with substitutes.This serves to give those substitutes playing time experience in an actual game situation, as well as to protect the best players from the possibility of injury. Garbage time owes its name to the fact that that period in a game is frequently marked by a significant drop in the quality of game play. This occurs for two primary reasons. First, the players involved during that time are generally less experienced, having not played nearly as often as the starting players. And second, the fact that seldom-used substitutes usually desire more future playing time means that when those players do play, they are often more concerned with making an individual impression than with executing team play at its best; this is especially true during garbage time because at that point, the matter of which team will win has already been decided anyway.Tomorrow begins the period of the trading year we refer to as Garbage Time. It can be fun to watch that handful of sub-5 dollar tech stocks and Chinese microcaps get run up into year-end. We've also seen plenty of market-wide meltups during this period historically, as people attempt to position themselves for the "January Effect." Shhh, don't tell anyone that the January Effect now begins sometime around Labor Day. Anyway, here are the rules of Garbage Time trading, as they've been passed down from trader to trader, desk to desk, for thousands and thousands of years on Wall Street: 1. Anyone who's had a good-to-great year is playing light, their books are closed and the track record is not being put at risk. Profits and losses at these same desks have likely already been harvested as well. So, in general, outsized trades are only being put on for window-dressing, tape-painting or other non-traditional reasons. Basically, this means not to make too much of what you're seeing, stop chasing cars like a cartoon dog with its tongue hanging out. 2. If you're trading seriously or intently this week, you probably blew up this year. The last week or so is like a Hail Mary pass at the buzzer. This is why you normally notice the thinner, higher-beta junk moving. Duh. 3. Garbage Time is a total "amateur hour." Buysiders like myself (especially those who've been on the sell side) know better than to come into this week with any real orders of consequence. The kid who's been left behind to execute trades while the Big Dogs are in Turquoise is probably not your best bet, lol. 4. Real investors have mentally closed the books on 2012 even if they've still got all their positions on. This is a week better spent cleaning out office desk drawers, de-cluttering hard drives and emailing best wishes to colleagues, customers and vendors. And thinking about 2013. I plan to spend most of my week reading all the previews and "look ahead" research reports for some semblance of the consensus view. Anyway, enjoy the show this week and don't play too hard. You can still get injured or beclowned during Garbage Time after all!
How about that for a headline?The financials, banks, XLF, broker dealers, or all of the above. The group they call, "The Financial Sector", has led the United States stock market higher for the year. Tell me the capital markets aren't awesome. I have conversations with random non-market professionals all the time. And to this day, if I tell them I'm buying banks, they get this disgusted look on their face, "Really, financials? Why?". I tell them, "there's one reason why -- look at your reaction". All those disastrous banks blowing up was over 4 years ago. Do you know how long that is in internet years? Instagram didn't even exist yet. Sentiment is a powerful thing. And it's our choice whether to take advantage of it or not. Bespoke Investment Group has a timely post up today showing the sector by sector performance for 2012. Financials are up almost 27% and leading the way higher for the market in 2012. How about that?
I hear you all chuckling. The Industrial Select Sector SPDR, (XLI), broke out over a week ago. Yes I know that. The daily chart below shows the breakout, back test and move higher. Old news. But
One thing I just think ought to be pointed out for those who don't follow the market that closely -- the Vix, the most widely followed measure of volatility, hasn't seen a print above 20 in almost six months.This is remarkable given all the "headline risk" we've been warned about now that China and Europe are undergoing a double decker, mutually-reinforced economic collapse and the fiscal cliff threatens to blow up all of our houses and jobs. When they write the chapter on 2012, they'll be remiss in not mentioning the things Mario Draghi had done this spring and summer and unfatten the tail risk.For more on this, read: TIME's Person of the Year Should Be Mario Draghi (Business Insider) and... FT Person of the Year: Mario Draghi (FT) Markets are much calmer in the face of possible recession than they are in the face of possible Lehman II. And it shows in the buying (or lack there of) of put protection: (BTW, now that I've posted this, expect a Vix spike to 30...)
As quaint as it sounds, one sign of a major decline being largely over occurs not necessarily when price starts to scream higher but rather when it simply stops going lower. Specifically, in the case of the coal and steel sectors, on their expected way to zero a funny thing happened-They stopped going down.Looking at the weekly charts of coal and steel, you can see that after ceasing to make new lows price has tightened up on this timeframe with Bollinger Bands starting to become constricted. Even with a Romney loss, coal could easily be forming a diamond bottom. Perhaps of equal significance, no new lows were made even after the (widely-viewed) anti-coal Obama administration won control of the EPA for the next four years with the election. Steel refused to give up the $40 level on its sector ETF, and is looking more and more like a massive base instead of a bearish consolidation on its weekly. As long as the emerging markets continue to show strength, it is hard not to become more constructive on the beaten-down steel and coal sectors as they make strides in their own right.
The stock market is a giant distraction to the business of investing. - Jack BogleThe S&P 500 rose for six straight days, and on Thursday, for the 13th time in a row, the index failed to extend a six-day winning streak into a seven-day streak. Nevertheless, the market continues to do well, which is exactly as I suspected. I'm still holding to my view that the market will rally well into 2013; this is a good time to be an investor.
I mentioned a few weeks ago that the next 2% either way would not mean much and since then the market has been very range bound if incrementally positive. This month the S&P 500 is up about 0.8%, with almost all of that happening Tuesday of this week. But as you can see in the charts below we have near identical setups in the big 3 (DJIA, S&P, NASDAQ) - a very obvious "inverse head and shoulders" formation, with the market fighting to create a new higher high. Immediately after the FOMC announcement the knee jerk reaction was "buy buy buy" which pushed these indexes (save NASDAQ) over those highs, but it did not last. Ironically the Russell 2000 had been the best of the bunch, being the only index to clear it's November's highs - and of course that was the worst performer yesterday. That said while the market has not been on a tear there has been very little pullback since the mid November bottom, so things were a bit short term overbought/extended by yesterday afternoon as well. This is especially true of things relating to China (the past week) and Europe believe it or not, the latter group being very hot markets the past two or so months. Emerging markets as a whole (China was the last to join) have also seen a lot of buying activity, so some of these areas are very overbought and need a rest of some sort. This morning we have a nice dip in weekly jobless claims - down 29K to 343K. These numbers are often strange this time of year with holidays so we'll see in mid January where things are more accurately. Retail sales which was the big economic number of the week came in at +0.3% versus expected +0.5%. One area that has been weak this week in general has been the retail stocks as a whole. So it might point to a less than happy Christmas season despite the annual hype. And in an economy 70% dependent on consumer spending that's an issue. Of course they will blame the fiscal cliff talk for the retrenchment. Bigger picture not much has changed than a week or two weeks ago other than an incremental move up in the major indexes - we need to see those levels cleared and held (not cleared and failed as yesterday) and then followed by the slope of these 50 day moving average changing from downward back to upward sloping. The longer we stay in this area +/- 20 S&P points the better chance that begins to happen. However, Apple continues to be an issue for the NASDAQ - showing little relative strength and as I type down another 1.6% this morning.