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January & February 2010 Cliff Notes at Trader’s Narrative

This is a guest post by Wayne Whaley (CTA):

Bearish Concerns

  1. January, which is a bell cow for the rest of the year, was down 3.7% (S&P 500).
  2. Too many in the bullish camp. In early January, the Investors Intelligence numbers showed 3 times as many bullish newsletter editors as bears.
  3. A few market experts (like Grantham and Claassen), whose work I respect, have taken a cautious market position.

Negative January’s Implication

  • Since 1950, the S&P is up 73.3% (44-16) of years for an average gain of 8.7% (excluding dividends).
  • If January is up, the odds increase to 89.2% (33-4) for February through December for an average gain of 12.3%.
  • If January is down, the odds decrease to 52.2% (12-11) for February through December for an avg loss of -0.08%.
  • Up January’s make the rest of the year a high probability bet. Down January’s turn the rest of the year into coin toss.

Bulls will point out that January 2009 was down 8.6% and the remainder of the year was up 35.0%. That is the biggest exception to the January barometer and the reason they ring the bell each morning and play the game. This could be a 2003, where the first month was down modestly (-2.74%) and rest of year was up 30%. But if you are long the market, it would have been more comforting to have had an up January in your hip pocket.

For the statistical details, see the data table below.

Gloomier Seasonal Stats for February
Since 1950, February is 31-29 (51.7%), which is the second worst record of any month. The average monthly return was -0.29%. Of particular interest, Februarys have fared poorly after negatice Januarys. Only 8 of 23 (34.8%) were positive, for an average loss of 1.55%. Recall February of 2009, ouchy. See data table for the numbers.

Intermediate Bullish Factors:

  1. Bearishness of the January Barometer is to a large degree offset by First Five Days of January rule. Each of the first five days of 2010 were up for a total gain of 2.68%. If the first five days of the year are positive, the remainder of the year is 29-8 (78.3%) for an average 12.1% gain. And if your still awake, if the first 5 days are up and the month of January is down, the last 11 months are 6-2 for an average 6.46% gain, a fairly normal year.
  2. The major capitulation sell off in October of 2008, the magnitude of which are not normally repeated again for several years (minimum 3 years), (see Stock Market Outlook for 2010). This supports the idea, that we are unlikely to have three separate bear markets (2000-02, 2008 and 2010) within a 10 year period.
  3. Continuing this thought, perusing the financial news and internet sites, you would think the market was 20% off highs, instead of 6.6%. Bearish sentiment shifting quickly. Interesting that 6.6% pullback is referred to as a correction by most. Doesn’t feel like a market top environment.
  4. Supported by the fact that retail investors have been consistent sellers throughout 2009.
  5. NDR recent work showing new 52-week highs peaking during the week of January 8th, which historically occurs several months prior to peak in price.
  6. Federal Reserve publicly committed to keeping fed funds near zero for foreseeable future.
  7. Index of Leading Economic Indicators (LEI) have been up 9 months in a row. Although, LEI strength has not always led to higher equity prices, I’m inclined to interpret as bullish coming out of a questionable economic environment where earnings are in question. Geez, nice GDP numbers.

January performance related to rest of the year

Note to Self:
Current pullback will likely develop into the double digit correction that we had called for in first half of 2010. But don’t give up on the market’s intermediate prospects; out of precaution, personal portfolio has been moved from “Aggressive” to “Normal” risk exposure. Look for some opportunities to take some trading shorts in February. However, not many were looking for the inevitable correction to occur in January, and February could easily defy odds as well. But we have to respect history to some degree.

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