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The January Effect

|Includes: ProShares UltraShort S&P 500 ETF (SDS), TZA

According to Jeffery and Yale Hirsch who publish the Stock Trader's Almanac 2010, the January Effect now starts in mid December based on data going back to 1979. If you are not familiar with the January Effect, it is a Wall Street term that states small cap stocks outperform big cap stocks from January until June and the launch date is now around December 15th. Since we are nearing that date and because I have a sizable stake in small caps with the Direxion Small Cap Bear 3X Shares (NYSEARCA:TZA), I wanted to bring it to your attention. In the two months that I have owned the Direxion Small Cap Bear 3X Shares (TZA), the ETF is down 30 cents or 2.61% and if history proves correct, it may take another hit here in the short-term. However, the January Effect does not always materialize as small cap stocks underperformed large cap stocks in January 1982, 1987, 1989, 1990 and 2008, but it is a pretty good indicator as Jeremy Siegel writes in Stocks for the Long Run. This does not mean that small caps won't go down in January if the market goes down. It just means that small caps will do better than the larger cap securities the majority of the time.

The January Effect is sometimes confused with the January Barometer, but they are not the same. To give a definition of the January Barometer, I will use the Wikepedia free encyclopedia: "The January Barometer is the hypothesis that stock market performance in January predicts the performance of the rest of the year...Historically if the S&P 500 goes up in January, the trend will follow the rest of the year. Conversely if the S&P 500 falls in January, then it will fall for the rest of the year. Since 1969 this trend has been repeated 32 of a possible 39 times.". Ken Fisher in The Only Three Questions That Count calls the January Barometer a myth and "remains wholly unsubstantiated", but this is just his interpretation of the data which is always a problem with investing. You never know who is right when it comes down to data crunching because of confirmation bias. Ken Fisher defines confirmation bias as: "cognitive error causing investors to seek evidence confirming their preset notions and reject contradictory evidence.".

Another Wall Street phenomenon that will supercharge your holdings in the short-term this time of year is the Santa Claus rally otherwise known as the "December Effect". This is a rise in stocks the last week of the year, between Christmas and New Year. Because I am not a trader, I generally don't pay attention to these things, but they will move the needle in your portfolio. I am currently down 43% in the ProShares Ultra Short S&P 500 Exchange Traded Fund (NYSEARCA:SDS) and this Chris Kringle flurry surely won't do much for my ego if history repeats itself, but as I've been stating right along since the beginning of this blog, we are long overdue for a correction. If the market corrects 15%-20%, I'm back to square one, but that's just wishful thinking right now. You may be wondering how far I will let my losses run in the ProShares Ultra Short S&P 500 Exchange Traded Fund (SDS). Well, indefinitely. It is always best to go with your convictions and since this is a leveraged ETF, it can go up just as fast as it went down.

Disclosure: Long SDS, TZA