January, Bloody January

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Includes: DIA, IWM, QQQ, SPY
by: The Motley Monetarist

Summary

January has been shown traditionally be a deadly month for individuals but a good month for the stock market.

However, the turn-of-the year is volatile and unsettling, at least if one looks at indicators such as the advance decline ratios.

It seems that the 2015-2016 turn-of-the year has been less volatile than the same period last year.

This presages a January 2016 market based on more traditional January indicators, such as reinvestment of tax loss proceeds.

January, bloody January.

"January, the month of empty pockets…" Colette

January is a killer month. The death count includes David Bowie, Glenn Frey, Alan Rickman, Michel Tournier, David Margulies (of Sopranos fame), amongst others. The sad list includes, for the most part, natural deaths, one suicide and at least two executions by beheading.

We're not done with the month of January. The devastating reputation of January (or at least the turn of the year) as a deadly time of the year has been documented by David Phillips, a sociologist at UCSD.

However, traditionally in the stock markets, the January effect, seems to go the other way, with unusually high returns developing by the end of January. A related idea is the "turn-of-the" year effect, whereby small stocks have been shown to have unusually high returns during the last days of December continuing throughout the month of January.

For an investor, what's not to like in January? Well, markets have been behaving strangely of late. But still, there are lots of reasons to believe that this January will be a January amongst countless others to reestablish investor confidence-including well-known phenomena of a rebound from tax-loss-selling, traditional seasonality, or that selling at the end of the year is parked to be reinvested during the month of January (as per Jay Ritter).

Advance-decline ratios during January 2016.

One indicator of market movements is the advance-decline ratios around the turn-of-the-year. The turn-of-the year phenomena have to be somewhat dissociated from the January effect (although they sort of blend together). Then there is also the small stock rebound. To that end, I have used one week lagged advance-decline ratios in the NYSE and Nasdaq to anticipate market movements. In particular, in addition to general trends, when individuals start to buy stocks again, they have a tendency to start with low capitalization stocks. The graphs below show trends in advance-decline ratios around the turn of this year in the NYSE and Nasdaq, and a comparison of one-week lagged advance. (All data in advances and declines from markets.wsj.com and price data from finance.yahoo.com).

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Around the turn of this year, the advance/decline ratio in the Nasdaq has pretty much followed the corresponding ratio in the NYSE, with the NYSE anticipating events in the Nasdaq. As well the one-week lagged advance-decline ratio seemed to do the same for the S&P 500, but behaving in a more jagged fashion than trends in prices overall.

Year-to-year comparison with 2015.

The analogous graphs in turn-of-the year 2015 shows a much closer tracking between the NYSE and Nasdaq advance-decline ratios compared to 2016 turn-of-the-year. But the one-year lagged NYSE advance-decline ratio and the NYSE is much more jagged than this year.

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2016 a more "normal" year?

The table below presents means and standard deviations of the ratios as well as the mean difference between the Nasdaq and the NYSE between turn-of-the year 2015 and 2016.

Advance-decline ratios

Mean NYSE

Mean Nasdaq

Mean difference (NYSE-Nasdaq)

Standard deviation NYSE

Standard deviation Nasdaq

Standard deviation differences

2014-2015

2.2

1.2

.88

2.9

2

2.74

2015-2016

1.55

1.6

-.04

1.98

1.71

1.89

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The turn-of-the year 2014-2015 showed more variability between the two markets than this year. The "small stock" effect seems to be reappearing this year, if only slightly. In addition, from the above graph, it seems that the one-week lagged advance/decline indicator seems to be tracking the market more closely.

Maybe, despite appearances to the contrary, this turn-of-the year is showing more of the "normal" January phenomena-namely reinvestment of tax-loss selling proceeds, and less purely "animal" spirits?

What to look forward to in the last week of January?

Death will still be calling for a number of yet-to-be determined individuals over the next week, rounding out the depressing toll for deaths in the mortal month of January. But, as far as the markets, and based on the lagged-advance decline ratio for the NYSE, here's what I foresee for the last week, at least for the markets.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.