For January, is it worth it for traders to even get out of bed?
We certainly have potential. The holidays are over, the kids are back in school, and we’re all getting back to work. Traders will be facing the first market open of the year with a set of opinions formulated and refined during the past two weeks.
Reports on Q4 2013 earnings will start coming out next week. Being the start of a new year, surely there will be some news, discussion, and fuss made about the budget, the dollar, the debt, the whatever, as various parties try to influence the direction of laws and public opinion.
Most of these are not new – they are factors every January. So it is reasonable to ponder on how the markets typically perform in January, as they try to respond to all this.
I ran a scan on the list of major indexes and sector ETFs I regularly watch. Many of the ETFs have only 12 or so years of history, and I focused only on the histories since 1980.
On the whole, the track records show little net movement one way or the other. The Dow Jones Industrial Average and the S&P 500 both averaged only a 1.2% gain, with gains in almost 65% of the years. But that means there were losses in 35% of the years. The Russell 2000 (RUT), the index of smaller stocks, has hardly any net movement, logging only a 0.5% average, and years with gains equaling years with losses.
The NASDAQ Composite, and QQQ, an ETF based on NASDAQ stocks with a tilt towards technology biotech, and financial areas, show a slightly larger average return and success rate.
One rather odd situation above is with semiconductors. The SOX index averaged a 5.1% gain and a 64.7% success rate, but SMH, an ETF based on semiconductor stocks, averaged only a 0.3% gain and a 53.8% rate. The top holdings and weightings differ between the two, and most likely the sharp gains of just one or two stocks made the difference.
I’ve never been a fan of presenting seasonal analysis on a specific-date basis, like from January 1st to the 31st. As a trader, I don’t think in terms of sitting around for the first of the month, taking a position based solely on a historical track record, and closing the position out at the end of the month.
Another reason is because the day of the week you enter a trade can make as much as a percent-or-two difference in the average net results. In January, the first trading day of the month can fall on any day between Monday and Friday, What difference does that make? A big one.
Say someone told you to enter a QQQ trade on a Monday of this coming week and exit the trade on the Friday close, 19 days later. Since 1990, this trade would have averaged a 2.0% return, with gains in 16 out of 24 years (67%).
But if you instead entered the trade on Tuesday and held it through the Friday close, 18 days later, the average return is 1.8%, with gains in 16 out of 24 years (67%).
If you entered the trade on Wednesday and held it through the Friday close, 17 days later, the average return is only 1.7%, with gains in 12 out of 24 years (50%).
If you entered the trade on Thursday and held it through the Friday close, 16 days later, the average return is only 1.9%, with gains in 14 out of 24 years (58%).
If you entered the trade on Tuesday and held it through the Friday close, 15 days later, the average return is only 1.1%, with gains in 13 out of 24 years (54%).
The day-of-week you enter a trade can make a difference. Duane Davis wrote a book titled ‘Never on Thursday, 26 Little-Known Statistical Facts That Can Make-or-Break You as a Trader’. The focus of his book was almost entirely on the S&P 500 futures. When I extended his analysis to individual stocks and ETFs, I found similar results. As a result, instead of producing seasonal analysis based on one specific date to another, the way most seasonal analysis is presented, I focus on the Monday (or first trading day) of each week of the year, and work out the track records from there.
In case you are wondering if there are individual stocks that do have strong track records for January, I can answer that. For the most part, no. I created a list of the stocks contained within several of the top indexes, the DJIA, the S&P 500, the NASDAQ 100, the S&P mid-cap 400, the S&P 600 small-cap, and so forth. I then filtered out all the stocks that have less than 12 years of history, were too low in price, or had a low average daily volume. That left me with 670 stocks, primarily the better known, actively traded stocks.
I ran the ‘one-month’ test – checking each stock’s returns over the first trading day in January through the last trading day in January. The results? Very few did much better than a few percent average return or better than a 50-60% success rate. There were at best only a handful that had track records anywhere near worth considering for a trade.
The best one? Parexel International (PRXL). It provides products and services for clinical research. PRXL has averaged a 12.3% return in January, with gains in 16 out of its 18 years (88.9%!)
In case you are wondering if PRXL would make a good bullish trade this January, Parexel does have decent fundamentals. Over the past year, the number of funds holding PRXL has increased from 376 to 445. The stock got pounded down last October when it reported earnings merely meeting the consensus. In early December, PRXL began recovering, as some strong buying came in. On December 12th, a Director of the company apparently felt the stock was a good value, and purchased $200k worth of the stock. The stock has since gained 10%:
Parexel is due to announce earnings around January 29th. PRXL’s track record of gains in January could be an indication institutions or larger traders make a bet each year on expectations of a good late-January earnings announcement.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, including the answer to the above question, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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