Breakout

Will January Effect Heat Up the Stock Market?

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If you trust believers of the January Barometer, by this time next week we'll know what kind of month or even year we're in for in the markets. The theory essentially says "as goes January so goes the year." Boil it down further and some would lead you to believe that just the first week of the new year sets the tone. In truth, the January Barometer has historically been fairly accurate in its predictions, prompting many investors take heed. According to Sam Stovall, chief equity strategist at S&P Capital IQ, since 1945 a positive January on the S&P 500 has led to a positive year on the index 86% of the time.

"Investors are an awful lot like dieters," says Stovall. "They look to January as a new beginning."

From his point of view, the early direction of the market speaks to a general tone, to either underlying confidence or fear, of how traders think the next 12 months will play out.

However, "you have to make sure that there is correlation with causation," Stovall cautions. "You want to make sure that it's not simply a random effect."

He uses the Super Bowl Theory as an indicative example that has a good track record but no causation. He's more inclined to wait until the end of the month and then apply the same up/down psychology to the top three performing sectors as his research shows comparably high rates of outperformance if you hold them for the next 12 months.

At the same time, for those inclined to bottom fish amongst last year's losers, Stovall's research shows that while the top sectors of the previous year are unlikely to lead the the market for a second year, the strong performers tend to still be close to the top. He says it is yet another actualization that more money is made by letting your winners run.

And speaking of winners, Stovall is all about the cyclicals right now, and says Discretionary (XLY), Industrial (XLI), and Technology (XLK) look the best.

What do you think? Is their a magical message in the month of January or is it just more market mumbo jumbo ? Lets us know in the comments section below or reach out to me on Twitter @MattNesto

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