Looks Like A Red January 2009
Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes. – Jesse Livermoore
And it is for this reason that patterns are one of the most reliable ways to analyze the market. Patterns tend to repeat just as history often repeats. It could be self fulfilling, it could be mathematical, it could even be coincidental … whatever the reason, it is undeniable that patterns in trading are reliable and understanding them reduces the odds of carry unnecessary risk into your trades.
In January, investors watch for one of the more reliable patterns known as the January Barometer – should S&P 500 close positively in January, there is a strong likely-hood that S&P 500 will close the year positively. Sam Stovall, S&P Investment Analyst;
Since 1990 the 3 best performing sectors in January beat the S&P 500 by an average 400 basis points per year in the following 12 months, and outperformed the market 75% of the time.
The pre-cursor for this indicator are the first five days of January which has a 50% accuracy rating;
So goes the first week of January, so goes the month, so goes the year.
If you didn’t already know, the first five days of this year were down -0.38% from the 2008 close. But there is another camp who disagrees because they have discounted the first trading day of 2009 which was on a Friday – if that Friday was recognized as the first trading day of the year, why was Non-Farm Payrolls on the following Friday? – thus putting the first five trading days as Monday 5th to Friday 9th January, for a loss of -4.74% from the 5th Jan open. Either way, the first five days were flat or negative, depending on which school of thought you’re from … bottom line: the first five days did not finish positively which translates to a poor* January and a poor year ahead. (*Read “poor” as “not bullish”)
On candlestick analysis, looking at weekly candles, last week ended a three candle pattern known as the Three Inside Down which is a very reliable indication of bearish conditions to come. This pattern tends to have legs and looking at the week that just finished, it has its justifications.
One other pattern that really stands out in my mind is the possibility of a 40 year cycle …
- In 1929, the market crashed, lost 89% from its previous high and started the Great Depression. This came one year after the 1928 election of Herbert Hoover, a Republican.
- 40 years later, in 1968, Richard Nixon, Republican, took over presidency after a power shift from the incumbent and majority Democrats. A year later in 1969, the market dipped losing more than 36% from its previous high.
- 40 years on, in 2008, Barrack Obama, Democrat, took office after another power shift from the incumbent Republicans. The market is already down 43% from its October 2007 high. For 2009, the DOW is already down 659 points (-7.4%) with 6 only trading days to go.
Apart from a few bright spots in the Technical sector, earnings have generally been disappointing while economic data has also be pathetic. Globally, economies are reporting considerable dips in their GDP outlook as both imports and exports have slowed drastically. All these lend weight to the possibility of the 40 year cycle becoming a reality. And if it does, we will be in for far more downside in the financial markets. On 2 January 2009, I wrote:
I did hope that Q1 of 2009 would be slightly bullish. But in the same posting as the one above, I mentioned that VIX would find support at the top of my channel and retrace upward come earning season …
… although it is still early days yet so it remains to be seen … but that kinda killed my hope for a bullish Q1.
A red January is not the best way to usher in the Year of the Bull.
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