The January Effect: Does it Matter in 2014?

NEW YORK (TheStreet) -- In several appearances throughout early 2014, Carter Braxton Worth, chief market technician and managing director at Oppenheimer & Company, has brought to attention the seemingly important trading month of January. 

January. The month where everyone's clock finally gets reset. All the good trades gone. Better yet, all the bad ones washed away. It's a new year. A new beginning. Another chance to make yourself whole and attempt to beat the market, again. 

A month where "new money" comes flowing in from mutual funds and retail investors who waited out the previous quarter -- or possibly several quarters -- looking for a better entry. Suddenly, in a new year with a fresh start, it's okay to invest at will. 

For the past five years, we've started the first day of trading off in the green. Not the case in 2014. 

For the past five years, we've ended in the green after the first five trading days of the year. Not the case in 2014. 

However, the significance of the second line is more important than the first.

In two separate appearances on CNBC's "Fast Money" TV show, Worth revealed the following about the S&P 500 (SPY):

When the first five trading days of the new year are positive, the month of January ends positive 76% of the time. When the month of January is positive to start the year, the stock market finishes the year positive 82% of the time. 

Then, he elaborated in a later episode:

Based on historical price action, there is roughly a 60% chance January will end in negative territory, since its first five trading days were negative, he said. When the month of January is positive, returns in February through December are up an average of 8.65%. When January is negative for the month, the return in February through December only averages 1.65%. 

Worth defended the data, saying that it dated back to 1927 and has been fairly reliable. I have no doubt that it is. I also have a lot of respect for Worth's data and research. I have found other seasonal data that he's used in the past to be useful and accurate. Worth is solid, without a doubt. 

With that being said, I think investors should take this round of probabilities with a grain of salt. 

My reasoning is rather simple: Fundamentals and technicals. I'll begin with the latter. 2013 was a year revolving around slow grinds higher, shallow pullbacks and most notably, new all-time highs. 

According to USA Today, the S&P 500 made 45 new highs last year. What's more fitting than to end the year at a new high? Doing so marked only the sixth time in the index's history. 

But that's precisely why I don't think this year's "January Effect" has as much significance. 

From Dec. 17 through year's end, the S&P 500 rallied roughly 4%. For an index of this size, that's simply a massive move. Consider that in ten trading sessions, the market claimed roughly half of its average annual gain. 

That's the wave we rode into 2014 and that's what investors and market participants are taking a break from. So where are we now? Wednesday marked the coveted fifth trading day of January. 

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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