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Daily Market Update – January 9, 2014 (9:30 AM)
Much has been said of the ability for January to predict the entire year’s stock market.
In fact, taking it even further, there are those who believe that the first 5 trading days actually have great predictive capacity for determining the outlook for the entire year.
Today marks the 6th trading day of 2014, so it must be time to make some conclusions.
An interesting article takes a statisticians’s view of the topic and is somewhat better than the more superficial mentions of how January may impact the remainder of the year. Unfortunately, this short and undated article appears to be about 10 years old and hasn’t considered the past tumultuous trading period, but still offers some meaningful insights. I’ve tried contacting the author to see if he has an update and will share the information, if he does respond.
However, I can tell you that his conclusions, when looking at those past years in hindsight, have been well founded.
In a nutshell, he believes that January is an effective predictor for the rest of the year, especially if January is a month that moves higher. What may be more useful, however, is what occurs when January moves lower.
In that case the correlation falls apart. The market could move lower or higher, as opposed to a greater likelihood of only moving higher. The belief expressed in that article was that during such a period moving in and out of stocks was an appropriate strategy.
For me, that’s like music to my ears, especially if the first 5 days.of 2014, which have been similar to the first 5 days of 2011, would result in a repeat of 2011.
That was an odd year, only in that the market ended the year unchanged.
It was a year punctuated by ups and downs in an alternating rhythm. As a result, it was also a year that saw a significant spike in volatility and, therefore, option premiums.
To be fair, the opinion expressed by the author specifically avoided the idea that the first 5 days of the month have any real meaning. He looked at the entire month of January, but taken together with the comments being tossed around about those first 5 days, it at least warrants some attention.
Thus far, the first 5 days haven’t set the world on fire, although the 6th day’s pre-market is pointing mildly higher and although not likely, tomorrow’s Employment Situation Report could create a large move in either direction.
Still, the very thought that a stock picker’s market may be on the horizon, one in which stocks are actually distinguished from one another on the basis of price performance, is a great and overdue situation.
If that is truly on the horizon that would mean less opening of new positions and more rollovers of existing positions, as the increased volatility would offer premiums more worthwhile, even when strike prices are more of a distance from current prices.
That’s not really the situation right now and hasn’t been so for much of 2013.
What’s also very appealing is that when markets do have such alternating currents it tends to be easier to find new positions worthy of purchase. Instead of a market where everything just moves higher imagine a world where there are tides and you can coincide moving in and out of positions with the flow of those tides.
That’s not really a dream, it’s more of a hope for the return of what used to be what we thought were regular markets.
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OTP Sector Distribution* as of January 8, 2014
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