Spiga

January upside in US and Global markets


A quick seasonal study of January will reflect a few things that are common for the first few weeks of January. I will still reiterate that the END of January / Feb might become very weak again.. The case for a January rally?

1) From New Year’s Eve to the fifth trading day of January, stocks tend to make a run. According to The Wall Street Journal, this annual advance is due to the ‘January Effect.’ (this is best for options trading)

The ‘January Effect’ is simply "a seasonal phenomenon in which stocks that have done poorly during the previous year start the new year off with a bang."

The momentum behind the ‘January Effect’ is caused by year-end selling. Investors who need to create tax losses, recognize capital gains, or raise holiday cash start selling in late December. They are joined by portfolio managers looking for some window dressing to add to their annual returns.

Donald Kiem, a researcher at the University of Chicago, first pointed out the exceptional returns of small-cap stocks during January in the years 1963 to 1979. Since then, history has repeated itself year after year.

2) Overall, big market moves most often occur in January. In fact, since 1972, January is the hottest month for the S&P 500 Index (SPX), producing higher average returns than any other month.

Since 1950, January has delivered positive gains more than 63% of the time. And more than half of the time, those S&P 500 gains were 3.46% or better!

Also since 1950, the Dow’s three best months by percentage gain all occurred in January, delivering returns of 14.41%, 14.19% and 13.87%.

And since 1971, the NASDAQ’s gain in January has averaged an amazing 3.7%, according to the Stock Trader’s Almanac.

3) In election years like the one we’re about to enter, the market bounce you typically see in January is even higher.

Consider these numbers: Since 1972, in the fourth year of the presidential cycle, the S&P 500 has delivered 2.40% gains on average, while the Dow has delivered 2.32% gains on average.
(A 10% stock move could result in gains of up to 100% or more in the option...plus you can buy call options for just a fraction of the cost of buying stocks. - Option Trading involves risk, consult with a licensed professional)

4) Fourth quarter ‘07 earnings – which will begin to be released in just a few weeks – is shaping up to deliver many potential upside surprises.

That’s because expectations for fourth quarter earnings have plummeted in light of the poor showing in the third quarter.

In fact, while "official" 3Q earnings are still being tallied, 3Q earnings growth is currently estimated somewhere between -2.5% and -4.5%, well below what investors were expecting before the announcements began.

And the negative 3Q earnings represented the first quarterly decline in earnings growth in more than 5 years, according to Thomson Financial and The Wall Street Journal.

That has caused expectations for the fourth quarter to drop precipitously. In fact, estimates for average 4Q earnings for S&P 500 companies – which were at 12.4% on August 10, according to Bespoke Investment Group – are now negative at -0.8%, according to Thomson Financial.

5) The Recent Market Correction Could Add Fuel to January’s Fire

Consider what the Stock Trader’s Almanac says: "Since 1964, there have been 16 fall declines of over 10%....Most often, it has paid to buy after fourth quarter or late third quarter ‘waterfall declines’ for a rally that may continue into January or even beyond."

I still feel the First Quarter of 2008 will have the BIGGEST downside risk for the entire year... But this First part of January might be the best upside move we will see in the first half of 2008 until the election season.

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