Market Timing / Market Direction Beware January Effect

Market Timing often leads an investor to look back at the past and question conventional wisdom. The so-called January Effect was first noticed in 1942 by Sidney Wachtel an investment banker. In a nutshell, investors sell stocks in December due to tax implications and for year-end window dressing. This allows investors to buy stocks in December at lower prices and in January when fund managers and investors re-purchase stocks, they push back up prices and investors can sell stocks for profits. To read more about the January Effect select this market timing link.

However my market timing indicators over the last 10 years definitely disagree. Market direction in the last 10 years has been decidedly negative when it comes to the January Effect.

Market Timing / Market Direction Disproves The January Effect

Recently I read another analyst telling investors to get ready for the next big buying opportunity thanks to the January Effect. He told investors that this December would provide a terrific buying chance and then to sell in the January upswing that the January Effect creates.

The problem is there is no January Effect. Below are my market timing charts since January 2000. Of the past 11 Januarys market direction has been down in 7 of them.  Below you can see the month of January from 2000 to 2010.

Market Timing / Market Direction refutes the January EffectMarket Timing / Market Direction would rebuke the January EffectMarket Timing / Market Direction would rebuke the January Effect

Market Timing / Market Direction – What I Will Be Doing This January

So while the January Effect is obviously not a reliable indicator, as an investor I will be careful selling puts into January. Any puts I sell now that expire in January I have to be aware stocks could fall low enough to place them in the money. Instead it would be more prudent to keep a fair amount of my capital in reserve to take advantage of any downturn in January and be ready to do more put selling in January.

Market Timing / Market Direction – For Covered Calls

For my investments that have covered calls, all are presently in the money. However as I move forward I will not be rolling my covered calls up between now and the end of the year. Instead I will roll my covered calls to the same strike into January. This is an obvious move to make, because if between now and mid-December stocks rally for the anticipated Santa Claus rally, call premiums will be higher for January. By selling covered calls into January at the same in the money strikes, I am more than protected for any selling in January. As well if stocks fall in January I will have a great opportunity to buy back my January covered calls in January for much less premium than I collected.

Market Timing / Market Direction – Going Forward From January 2012

Investors need to ask themselves how dangerous is the situation in Europe. I think it is going to get worse. As well APEC believes the developed world is entering a recession that will affect all nations. Meanwhile Europe is already in a recession. All the same obstacles remain in the United States (unemployment, housing, slow growth etc). Therefore going forward what is going to drive stocks higher? While there will be rallies here and there, any strong sustained upswing in the markets must have more than just a catalyst. It needs a number of positive factors that can keep pushing stocks higher. Currently my market timing indicators have few positive indicators.

My outlook is that the markets will have a difficult time moving higher. By staying month to month or at the most 2 months out with put selling I can try to stay with the market direction. With covered calls it will be the same. Stay in the money and take advantage of downturns to buy back covered calls and then wait for an upswing to sell them again. But until the market direction changes for the better, staying in the money with covered calls offers a lot more downside protection.

Market Timing / Market Direction – Chance Of A Crash

What are the chances of another stock market crash in 2012. If matters worsen in Europe, I would place the chance of a stock market crash in 2012 at 60%. I do believe the S&P 500 does have a good chance of breaking 1000, primarily because if the market does not climb it will eventually pull back and re-test different support levels. 1000 is a strong support level for the S&P and will probably get tested.

So there you have it. I will be watching my market timing indicators as I continue the cautious bull strategy and stay careful particularly into next year as I believe market direction will remain volatile.