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The January Effect: Does it Matter in 2014?

Stocks in this article: SPY

Should we have closed in the green during that five session stretch, there would be an increased chance at ending the month in the green and an increased chance we would end the year up higher as well. 

But we're a mere 0.6% in the red! C'mon now. So because we ramped into the close of 2013 and took a couple of days to digest and realize profits, we're going to have a lackluster 2014? 

I think not. And if we do, it's unlikely to be from the January Effect. Fundamentally, the story is still the same as it was in 2013. The unemployment rate -- while a debatable figure -- is falling and payrolls are trending higher, (although December's nonfarm payrolls report was nothing to write home about).

Both domestic and global economies continue to recover, while investors and corporations are beginning to feel more comfortable with investing. Outflows continue to pour out of bond funds and into stock funds. 

Finally, the Federal Reserve remains extremely accommodative, despite beginning to taper its stimulus plan. 

Because the market lacks a sizable negative catalyst to hurt equities, there isn't a real reason to be avoiding stocks. Sure, some risks could potentially exist, like rapidly rising interest rates or another government shutdown. But they don't currently exist. 

Throughout history, as Worth points out, our failure to close in the green after the first five days says we don't have a 76% chance of ending January in the green. And because of that we don't have an 86% chance of ending the year up some 8.5%.

But these are simply probabilities. High probabilities, admittedly, but estimates nonetheless. It does not say that because we closed in the red after five days, there is a 100% chance we'll finish January in the red and therefore have a 100% chance of finishing 2014 in the same fashion. 

Sure, maybe there is a 60% likelihood the month of January will finish lower because the first five trading sessions finished lower. But like the weather-optimists say about rain probabilities and the sunshine: There's still a 40% it won't happen. 

Different circumstances, different timing. That's all. Don't let the seasons fool you.

At the time of publication the author held no positions in any of the stocks mentioned. 

-- Written by Bret Kenwell in Petoskey, Mich.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.
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