Does January Really Set the Pace of the Year?

by Jay Pestrichelli on January 12th, 2012

This time of year we all look to the turning of the calendar to give us some indication of the way the year will play out.

Of the past 62 years, January was up 32 times and down 30. Pretty close to a 50/50. Of the 32 times January was up, the remainder of the year (February to December) continued the trend and closed higher 27 out of 5 times. That would seem like a pretty good metric to watch.

However, of the 30 times January was down, the remainder of the year followed the trend and closed lower only 11 times. This means the February through December period was up 19 of the 30 years January was down. This doesn’t really give a lot of confidence to the trend theory, but good for long-term investors, I guess.
What about the months just following January? Of those 32 times January was higher, February was up 21 times AND March followed suit 13 times. February shows some truth, but continuing into March seems less likely. The 30 years when January was down, however, February was down only 11 times and March continued the decline a measly 4 times.
While there is some evidence of a positive January leading to additional gains in the next month or over the remainder of the year. The negative trend shows little proof of continuation.

What stood out was that of the last 62 years, February was up 40 times. The same held true for March. Of the last 62 years March closed higher than February 41 times. And on an even broader scale, the February to December time period was positive 46 out of the last 62 times.

While it's apparent that an up January can lead to an up year, it seems like February and March have higher chances of brining higher gains.

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Jurg - January 26th, 2012 at 11:10 AM
As it looks like we´ll have an up jan, chances favor an up feb - dec period (27 out of 32 times).
Question remains what happens in between, does sell in may(or earlier) and go away to come back after break still apply??
Jay Pestrichelli - January 26th, 2012 at 2:04 PM
Jurg-thanks for the comment and good question. I'll post the data used to come up with the post about January in our resource page for you to take a look at if you like.

At a glance, it appears that the middle months are choppy and flat at best.

I'm curious, with the market up 14% since Thanksgiving, are you still bullish about February?
Jurg - January 27th, 2012 at 3:00 AM
Jay, thx for yr info, will look it up. As to yr question, since the oct lows we´ve had a 4 month rally, looks like a good (longish type) move up. I´m following closely the seasonal chart for election years, looking for mch/apl highs and june/july lows with a following rally into year end, closing higher for the year. This seasonal shows a break in the jan/feb slot (which mite or not get) before the mch/apl highs. Also following closely the weekly tech analysis of the 2 ubs guys(Riesner and Muller), which you probably know. As of now and trying to ajdust my portfolio acording to yr book, which i just finished reading, i´m selling calls june on long stock positions and buying etf shorts on (SMI/DAX/S
Jay Pestrichelli - January 27th, 2012 at 7:57 AM
Glad to hear you're hedging. Make sure you've got puts on those long positions. On a relative basis, puts are cheap right now, so buying out to Jan13 for stock you intent to hold for the year is not a bad idea. Use those calls you're writing to help offset the cost.

If you are going short ETFs in the near term, you might want to read our article on Minyanville today that gives 6 ways to do it.
Jurg - January 28th, 2012 at 5:32 AM
Jay, read yr article on short ETFs, got a bit worried as to time frame. How can i get more understanding as to why this trade only works for short term? I was thinking of using this vehicle as a medium term portfolio hedge, which seems to be a wrong assumtion.
Jay Pestrichelli - January 28th, 2012 at 2:10 PM
Jurg-That article is about short tem because Those specific ETFs themselves will lose value over time because of the way they are calculated. So time is working against you. You are correct in reading that on a TRADE basis the suggestions of that article are meant for the short term. If you get to mid to long term we have to get back to the Iron Rules and keep volatility low. One of the best ways to do that is to do it on a non-leveraged ETF. If you're comfortable with spreads, I would check out a bear put spread or bear call spread on SPY. Keep your Implied Leverage around the 1.0 ratio and define the your capital at risk.
Jurg - January 31st, 2012 at 3:23 AM
Jay- If i understand u correctly, you suggest using SH rather than SDS as medium term short portfolio hedge say for 3 to 6 months? Is that correct?
Yes i understand vertical spreads form reading yr book(allthough never used as of yet. Looked at put bear spread on 06/12 SPY options -121.00 / 141 or call bear spread same expriy 141.00 / - 121.00. Do any of these look atractive/viable to u?
Jay Pestrichelli - January 31st, 2012 at 9:05 AM
Jurg-Those are both good spreads to consider (essentially they create the same position) for 4 reasons. 1-June is a good time-frame as it gives you 4.5 months for your thesis to occur. 2-These also have a low hedging cost of only 0.50, which on a annualized basis is less than 1%. 3-You have managed your Capital at Risk. Worst case scenario these positions lose about $9. 4-By using a spread you are making effective use of your cash. You essentially can be short a $131 ETF for the price of $9 a share.
Just don’t be tempted to over-leverage…I know its tempting…trust me I know…

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