Did the January Effect Start on November 1st This Year?

Includes: IVV, SPXL, SSO
by: Joseph L. Shaefer

The last correction – such as it was – took the S&P 500 from 1098 on October 19th down to 1036 on October 30th. Sunday the 1st of November was All Saints Day and the saints have been marching ever since.

We are now at 1106 on the S&P and into the time of year that is typically very good for the market. Thanksgiving week has been up 6 of the past 7 years, as it often is. As long as there is no major catastrophe lurking on the horizon, or – and this is important – no major catastrophe that has not already been digested by market participants, the week is usually a good one.

That last comment is critical. Heaven knows we have lots of major catastrophes out there: we call them Unemployment, Foreclosures, Geithner, Congress, Low New Home Sales, Congress, Low Retail Sales, Low Home Prices, Congress, etc. But all these are old news and, frankly, if they were going to destroy the market’s momentum they might have done so by now.

Logically, the market is well over-extended. Logically, it is ripe for a decline. But I think it may confound those who invest according to logic this time around. The market may well surprise – it has a way of doing that. Right now I see as most likely a good week, followed by the usual end-of-month strong period, augmented perhaps by less-than-dreadful retail sales on Black Friday (the day after Thanksgiving, when many retailers move into the black after a summer of low sales). Then there is the “usual” good tidings as we approach Christmas when there may be a little tax selling -- but since the institutions have already done almost all of that by now, this period may be strong, too.

Then comes January, a time when many stocks tend to increase in price. Does this phenomenon always happen? It doesn’t occur every year, but does so in enough years that, if you bet an equal amount on that likelihood every January, you’d come out ahead over any reasonable time frame.

Why does this occur? The usual excuse/rationale is that tax selling depresses stocks in December and they rebound in January.


There may be some of that, but it’s more likely because December 31st to January 10th or so is when, if you’re still employed, you are most likely to get an annual raise or a bonus, meaning there’s simply more cash available for spending and investing.

Also, all those pension and mutual fund managers, bank trust departments, corporate portfolio managers and investment advisors receive bonuses based upon how well they perform.

As a result, there is a “regression to the mean” toward year-end -- then a burst of activity as money managers strive to outperform the averages out of the box. Imagine you are a baseball player on a team where, as long as you bat .280 or better, you get to keep your million-dollar salary; you get $975,000 even if you only hit .150 - but you get a massive bonus of another million if you can only hit .290.

In this scenario, if you are a portfolio manager around .280 near year end – and many portfolio managers are there now -- even if the problems in the economy are still with us, there is a great incentive for these guys to get, by analogy, from .280 to .290.

It is that – call it greed or call it enlightened self interest – that may well keep the market going beyond where a reasonably prudent observer might think is reasonably prudent.

Regardless of what happens these final 6 weeks, I wouldn’t imagine any correction right now would be a major one. Both the hero portfolio manager and the goat portfolio manager want to come out swinging for the fences at the beginning of the new year, which "should" stop any correction in its tracks.

If they get their hits early on, they know they can keep the big bucks coming in rather than having to get a real job. Once they have a decent batting average, they can again regress to the mean. That’s why I think we may just escape a major correction now – but have to endure one sometime starting in February, March or April and lasting on into the summer of 2010.

There is one other reason why late December and January often moves forward in the markets: Congress is not in session, the Supreme Court is on holiday and the President is lighting Christmas trees and preparing for the annual State of the Union hornswaggle. The markets despise uncertainty and every time these august bodies get together uncertainty, turmoil and confusion reign supreme. The market reacts in fits and starts, fears and hopes, ups and downs when our esteemed officials are at play in the fields of L’Enfant. When they are out kissing babies and collecting ACORN money, however, both Wall Street and Main Street can breathe easy, invest with comfort, and watch the markets do what they do two-thirds of the time -- drift upwards.

Someone once told Will Rogers that Calvin Coolidge was a do-nothing president. “Well,” Will opined, “it’s true that he done nuthin’. But, then, maybe what the country needed at that time was to have done nuthin’.” That's when politicians do their best work -- when they collect their paychecks, stop mucking up the country, and do nuthin'. The same might well be said for our long portfolios. Of course, having said that, the market may now do its best to prove me wrong! After 40 years in this investing game, I am never far from the exits “just in case.”

If you have watched much of this move from the sidelines and want to catch up, it's probably not worth the time to start researching individual issues. If the scenario I’ve described unfolds, a simple S&P 500 ETF will likely serve you better, with better diversification, than risking the possibility of a decline from one or a few ill-chosen stock selections.

Conservative investors might want to take a look at the iShares S&P 500 Index (NYSEARCA:IVV). For those confident that the above is the most likely scenario, you might consider ProShares Ultra S&P500 (NYSEARCA:SSO). And, for those with serious conviction and nerves of steel, have a look at Direxion Daily Large Cap Bull 3X Shares, with all the caveats articles too numerous to mention on SA have discussed regarding these 3x ETFs (BGU)…

Author's Full Disclosure: We and clients for whom it is appropriate are long IVV, SSO or BGU.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless –our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running but there is no guarantee that we will continue to do so.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

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