It's the first week of 2012, and the mainstream finanical experts have already turned their deck of old proverbs over to start again from the very top. Their first card is "the January Effect" -- the widespread notion that the performance of stocks in first month determines the rest of the year.
And if the following slew of January 4 headlines is any indication, belief in this adage is alive and well: "How to Play the January Effect" (MarketWatch) --- and --- "Looking For the January Effect" (Associated Press) --- and --- "January Effect Could Help Keep Bid in Stocks" (CNBC).
The purpose of these aphorisms is to corroborate the ultimate tall tale of Wall Street: namely, that the stock market is an efficient machine that consistently follows seasonal trends. The problem is, these time-specific tendencies are not that consistent.
First, let's consider "the January Effect":
- In 2010: During the course of January, the Dow Industrials plunged 400 points. Yet, the market ended the year more than 1,000 points higher.
- In 2011: January saw the market rise 300-plus points. And, while the Dow ended 2011 with a marginal 5% gain, the S&P 500 saw its smallest prices change for any year since 1947.
And then, there are these familiar saws of seasonal wisdom:
The "October Jinx": Yes, this month has marked some of the darkest periods in stock market history: 1929, 1987, and on. Historically, however, it's not the worst performing month. For example, the supposed "Halloween Jinx" failed to bring a deathly pallor to stocks in 2010 or 2011. The latter year, in fact, saw an enormous 1,000 point gain in October alone.
The "September Curse": If you think October is supposed to be bad, September is widely assumed to take the financial killing cake. Yet in 2010, U.S. stocks enjoyed their strongest September in 71 years! In the mirror opposite, 2011's September saw the Dow plunge some 500 points.
The "Sell in May and Go Away"-- and don't come back till St. Leger's Day (which is in early September): In 2010, if investors heeded this wisdom, they would have missed one of the strongest uptrends in stocks of the entire year from July to September. Yet, in 2011, the market's May-to-early October free-fall suited the adage nicely.
Bottom line: Your choice comes down to old adages or objective analysis.
Pick the latter: EWI's premier publications: The Elliott Wave Theorist, plus Elliott Wave Financial Forecast and its near-term sister service, Short Term Update.
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