Why You Should Do the Opposite of What the January Effect Says

“Profit Confidential” Column, by Michael Lombard, CFP, MBA

I’m sure you’ve heard about the January Effect indicator.

It says that if stocks are up in January, the stock market will be up for the remainder of the year. If stocks are down in January, stocks are likely to be down for the year.

While the January Effect was, in fact, a good indicator years ago, since it became so popular on the Internet and with stock market commentators (who nothing about stocks), this indicator’s reliability has vanished.

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Case in point:

Let me remind you about January 2009. The Dow Jones Industrial Average lost 1,000 points in January 2009, falling like a rock from 9,000 to 8,000. The Dow Jones fell 11% in January 2009, but 2009 ended up being one of the best years ever for the stock market!

Don’t put “stock” in the January Effect is my first message today. Here is my second:

If my readers learn anything from me, it should be that only fools rush in. While stocks took a beating in the last few days of January, and many analysts were calling the bear market rally as over, I was pushing patience upon my readers and I’m very happy I did so.

In the past two days, the Dow Jones has gained 230 points, bringing it back to breakeven for the year. The stock market loved President Obama’s budget proposal, because it confirmed continued big deficits for years to come. More national debt places pressure on the U.S. dollar and the stock market has told us repeatedly that it likes a weak U.S. currency.

I continue to be in the diminishing camp that sees life left in the bear market rally that started in March 2009.

Michael’s Personal Notes:

I’m not a big TV person and, with all my studying/writing about the stock market/economy and running a business, I rarely turn the TV on. But Sunday night was a different story in my house, as my teenagers had every TV in our home tuned to the Grammy Awards.

Why am I bringing this up?

Watching parts of the Grammys Sunday night with my kids, my view on how the morals of society continue to deteriorate were only cemented. While the women clearly carried the show (i.e. Beyonce and Taylor Swift), I was so disappointed in the male musicians. The words that come out of these rap songs would have been forbidden on TV or radio in the 1950s and 1960s. Grown men, mostly with their pants falling down (the current style), shouting profane words on a stage in front of millions is totally classless.

This is not music. It is noise.

Where the Market Stands:

The Dow Jones Industrial Average starts this morning down 1.3% for the year. Please see my lead article of today (above) for thoughts on where the market stands.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top performing stock markets in 2007 — up just under 20% for the year.