JANUARY EFFECT, AND GREEN-LIGHT TIMING

January 15th 2015: The January Effect.RED-LIGHT, GREEN-LIGHT I’ve been waiting for today to post this information on the January Effect.

About the middle of the month, like today, the market starts to move. January is typically a very good month in the stock market. More below. But first a few thoughts on what I call the RED-LIGHT, GREEN-LIGHT PHENOMENOM. This my way of saying “into and out of the earnings season.

In short, red means no news, and green means news—as in the quarterly earnings reporting season. This is a very important discussion and in fewer words here (as compared to my books), I’ll try to do this topic justice. There are four earnings reporting seasons, designated by the quarters. This is not calendar quarters, though it seems so because the vast majority of companies post earnings by the calendar quarter. Others have fiscal quarters that end on June 30th, or even February 28th (Like Research in Motion—BBRY, but they’re Canadian and that explains a lot). When the quarter ends the company has 45 days to get the SEC’s 10Q filings in. At the end of the year, again, for most companies that’s December 31st, they have 90 days to get their annual filings in. That’s where we are now. About 8 to 10 days after January 1st, the reports start. Accompanying these announcements go commentary, not only by the company but by the financial pundits, and brokerage firms. This is the Green Light period, and we’re entering that now.

Two quick points and we’ll get on to the January Effect. One, no one ever says, “Hey everybody, we’re leaving the earnings season.” This is important to note. Write it down. These periods have a profound effect on trades, especially if you trade options. Two, I do not have empirical data of this observation, but about 90% of the time, on the actual earnings announcement stocks go down. Usually not a lot, but it’s the classic case of “BUY ON RUMORS, SELL ON NEWS.”

Stocks may go up, down or sideways moving into earnings, but once the announcement is made they sell off—and this is usually true even if their numbers are good. About the only exception to this is if the comments about the future earnings or profitability of the company are touted.

JANUARY EFFECT

There are several reasons—read that cause and effect—for January to be a good month in the market. 1] We are an optimistic people. It’s a new year—full of hope and happiness expectations 2] Many people who trade and invest in the stock market with their pension or IRA money usually tap out or hit their maximum donation in the previous summer. The New Year arrives and they’re good to go again. 3] The BIG money has to go somewhere. The stock market still provides on of the most liquid forms of investments. Many big firms liquidated stocks the previous year and they often wait until the end of the year (the Santa Clause Rally) and/or the first of the next year. They also must get their accounting finished to know what their taxes will be. They need to know how much cash they have to work with. 4] Speaking of BIG money, these fund managers try to get ahead of all inflows of money, even from the small investors. They want to get in the way of progress. 5] Earnings season starts for the fourth quarter, indeed the whole previous year. We enter the new earnings season. There are a lot of trades made on speculation, see the Red-Light, Green-Light section above. 6] Everyone who has studied the markets for a while—especially with an eye for earnings growth—note that January is usually a good month. Historically January is one of the best months of the year.

That’s about it. At least enough to get you thinking.

Wade

Stock MarketWade Cook