Discover How January's Action Will Position You for Future Profits...by Ron Ianeri

Discover How January's Action Will Position You for Future Profits...
Monday, February 1, 2010

The market had a pretty bad week last week, as a major support level on the Dow Jones Industrial Average was broken and confirmed.

All week long, the Dow struggled to maintain the 10,200 level. Then, finally, on Thursday, the Dow closed well-below 10,200. It closed down again on Friday, which was technical confirmation of the 10,200 breakdown.

Last week’s action was important on two levels that I’d like to talk about.

The first topic of conversation is known as the "January barometer."


'The January Barometer': Market Under Pressure?

The January barometer states that, as the S&P 500 goes (i.e., performs) in January, so goes the rest of the year.

For the record, the S&P was down 3.3% in January. A down January is supposed to indicate a down year ahead for stocks.

Now, I know what you are thinking ... this is one of those stupid indicators that really has no connection to the market, and this is one of those coincidental things.

In many cases, this would be true. But when looking back into history and testing this “theory,” you can’t ignore the results.

Since 1950, there have been 20 down Januaries in the S&P. Twelve times, the market finished the year down. Seven times, the S&P battled back to finish unchanged for the year.

Only once in those 20 years did the S&P finish higher after a losing January.

Wow, those numbers are enough to make you take a second look at this. So, I did!


A Confirmation From the Dow

I looked at the same theory, but this time I used the Dow. Guess what I found ... the numbers were pretty much the same, especially on the downside.

The really scary thing was that, every time the Dow was down in January, there were only four times it finished up for the year.


Darn thing was right 95% of the time!

You might talk about coincidences, like the supposed "Super Bowl Indicator," which says the market is almost always up when an AFC team wins the Super Bowl.

This may be true; however, there is really no connection between the two.

There is no explainable reason for the market to be up when the AFC wins the Super Bowl. They are totally unrelated!

So, when looking at the January barometer, we must find an explanation that indicates some type of logical pattern or relationship that connects the two.

You need to look no further than another January theory called the "January effect."


An 'Effective' Indicator?

The January effect says that, in the first week or so in January, the market will be up.

This is due to the fact that many people use the week between Christmas and New Year's to dump their losing positions so that they can get the tax write-off from the trading losses.

After the New Year, the positions are bought back into the portfolio. All of this “re-buying” creates an increase in demand, and the surge propels the market higher in the first week or so in January.

Now, if those who sold out their positions between Christmas and New Year's decided not to buy those positions in January, then there would probably be no catalyst for the buying in early January that would get the year off to a good start.

You might say that a lack of buying does not necessarily lead to an increase in selling. But, let me tell you from experience, it does!


Where is the Opportunity in All This?

As a trader or investor, we look for patterns in the market, especially recurring ones. In the case of the January effect, we see the market trade up in the first week or so of the year, a very high percentage of the time.

There is the recurring pattern ... market up the first week or so of the New Year.

Boom -- there is a trading opportunity. (Be ready to leverage these opportunities with options. Click here to learn how.)

But traders realize that -- just as there is potential in the occurrence of a persistent pattern -- there is also opportunity in the non-occurrence of that recurring pattern.

The absence of this highly regular event should draw questions from those astute traders who notice this non-occurrence.

Why did the January effect not happen? There are many possible reasons, but they all ultimately point to one answer … a lack of confidence in the market’s ability to go up!


What's an Investor to Do?

So, as a trader, I will come to the conclusion that people did not re-buy, after selling at the end of the previous year’s tax-selling, because they do not have confidence in the market.

So I sell.

And so do many others.

Now, the rout is on and gaining momentum. The selling begets more selling.

By the time January ends, all of the selling -- which started with the lack of buying in the first week or so of January (a no-show of the January effect) -- produced a round of selling that took us through the end of the month, creating a losing first month of the year.

Now this makes some sense!

The second topic of conversation picks up where the first leaves off.

In order for the selling that starts after the no-show of the January effect to continue through the rest of the month, there needs to be momentum. Just some selling is not going to do it.

More than that is necessary to ensure January finishes down for the month.

What we need is some technical help. We need the selling to break some support levels to draw in more sellers ... in this case, the technical sellers.

Last week, we got exactly that; a confirmed technical breakdown.

The signs of this potential breakdown were glowing. Normally, when the market comes down to a support level, the market bounces up off the support level ... hence the term “support.”

At the end of the week before last, the Dow had traded down to its support level of 10,200. After touching the support level, the market did bounce up off of that level, but not with much conviction.

With a lackluster bounce, the market traded back down to the support again.

This happened several times until the support level finally broke. But the break of the 10,200 level was not convincing. The level was only broken by a little bit.


Enter the Plunge Protection Team!

Three times, the Plunge Protection Team tried to drive the market up by jumping into the pre-market futures and creating the appearance of a positive opening.

The PPT’s idea was to get some upside momentum and get it supported by the earnings reports due out later.

This seemed to work, but only temporarily.

Each time last week, the market opened up but ended either down or unchanged as the upward jump-start provided by the PPT fizzled by the close.

This showed a real weakness in the market, which inevitably, on Thursday, closed convincingly below Dow 10,200.

Knowing that technicians look not only for the violation of support but also for confirmation, the PPT had one more shot at trying to avert this breakdown.

And, it was important. They already had the January barometer working against them, which would definitely hurt investor confidence going forward.

Now, they were looking at a possible breakdown of a very, very strong support level.

That does not bode well for the idea of building the consumer confidence that everyone tells us is so important to consumer spending, which constitutes 70% of the economy.

They tried hard to make a push in the pre-market futures on Friday, which led to a positive opening and a run toward 10,200. It failed in the late morning.

Another run occurred later in the day into the close. But that, too, failed by the bell. The market finished down for the day -- a confirmation of the Thursday breakdown.

Things do not look very promising and, if the January barometer is as accurate as it has been in the past, we could be in for a long, ugly year!



Ron Ianieri
Contributing Editor
The Tycoon Report

P.S. I don't panic when stocks start to slide, because I use options to get positioned for profits whether stocks are soaring or sinking.

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