A Positive January Means an up Year for Stocks

Understanding why January is so important in predicting the rest of the year for the markets.Stocks continue to maintain a positive bias in January, with technology and small-caps leading the charge. The NASDAQ is up over three percent in the first two weeks of January. The small-cap Russell 2000 is up 2.30%, while DOW and S&P 500 are up about 1.33% and 2.07%, respectively, in January.

Some of you understand how important the month of January is to the rest of the year. An interesting historical pattern will be in play this month called the “January Effect.”

The theory is that what the S&P 500 does in January will likely dictate the rest of the year. Consider that, since 1950, this relationship has been accurate in 54 of the 60 years, or 90% of the time. This is amazing and, unless we see a major development such as worsening debt in Europe, stalling growth in China, or stagnant economic growth, the January Effect will occur, so let’s keep a close eye on what happens this month.

The price charts of the key indices I follow continue to favor additional advances.

Advertisement

Overall, the near-term technical picture remains bullish on above-average Relative Strength, but you should watch the overbought technical condition.

Sentiment continues to be bullish. The trend of the NYSE new-high/new-low (NHNL) index has been edging higher, with 125 of the last 131 sessions bullish. Yet, the investor sentiment reading on the NYSE was unusual last Thursday. The reading showed 70 new lows along with 309 new highs. There have not been this many new lows on the NYSE since 80 new lows were recorded back on August 31, 2010.

Perhaps we are seeing a loss of momentum? I doubt it and feel it may just be a case of some profit taking.

In the technology area, investor sentiment on the NASDAQ has been mixed since May 6, but 84 of the last 89 sessions have been bullish.

Below find a brief commentary with each of the four indices.

NASDAQ

The near-term technical picture is bullish on above-neutral Relative Strength (RS), so there could be more upside gains in the near term.

The index is above 2,700 and holding well above its chart top of 2,320.

The NASDAQ is holding above its 50-day moving average (MA) of 2,607 and 200-day MA of 2,387. The 50-day MA is above the 200-day MA and is showing a bullish golden cross.

Watch, as the index is extremely overbought, so there could be some near-term selling pressure.

DOW

The near-term technical picture for the DOW is bullish on above-neutral RS, so there could be additional gains in the near term.

The index is above its 50-day MA of 11,406. The 50-day MA is holding above its 200-day MA of 10,775.

Watch, as the index is overbought.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 are bullish on above-neutral RS, so there could be more gains.

The break at 1,200 was bullish. The index is above its 50-day MA of 1,231 and 200-day MA of 1,151. The 50-day MA is above its 200-day MA.

Watch, as the index is overbought.

RUSSELL 2000

The near-term picture for the Russell 2000 is bullish on above-neutral RS, so watch for some more gains. The index trades with the economy.

The index is hovering around 800 and is above its 50-day MA of 759 and the 200-day MA of 686.

Watch, as the index is overbought.

The key for stocks will be to hold above the 50-day MA and the previous chart tops. And, as long as the sentiment remains bullish and January returns positive, I expect more gains this year.