January 2010 has rolled in, and all in the financial world is as it should be. Despite the sell-off on Friday the 15th, the major indices are up for the month, the economic recovery is inching forward, and uncertainty still rules.
The so-called “January Effect” might or might not be in play (buying bargains after a December sell-off for year-end tax purposes), but, who really cares. As traders and investors, we should be very careful about basing decisions on media labels derived from historical data. The market bucked the historical trends throughout 2009, as portrayed in this article from The Market Oracle published September 4th of last year …
The market has done quite a job of ignoring its history so far this year. It experienced a sizable loss of 25% in January and February, during its usually positive winter months, not launching into a sizable rally until March. But that rally continued to roll right through May, defying its historical ‘Sell in May and go away’ history. It did decline for four straight weeks beginning in June, following its history of “If May doesn’t get you, June will.” The rally then resumed in July, also not unusual, as there is usually a minor summer rally.
The summer rally continued through August, the first month of the market’s historically worst three-month period of August, September, and October. That has a lot of people claiming that since the historical patterns have been off so much so far this year, they will therefore be off for the rest of the year. Don’t be too sure of that. The historical pattern for the rest of the year is that September tends to be a down month, leading into a correction low in the October/November timeframe, which is then followed by a significant rally through the end of the year. There are reasons to believe the market is setting up to follow that pattern.
Well, the market did not follow that historical pattern, and I am not surprised the author of the article totally missed the boat. I don’t have much faith in punditry, especially when it comes to financial markets in this moment of history. Despite the fact that markets tend to repeat patterns, making decisions based on that might very well prove costly. Context defines every historical moment, and no context is ever the same because no time in history is ever the same. So, given this, I say, “What January Effect?” Small-cap stocks are up and down, the technology sector is surfing the same wave …
Intel shares fell more than 3 percent even after analysts from Credit Suisse, Raymond James and JMP Securities, among others, raised their price targets on the stock. JMP Securities and Thinkequity raised their ratings to “outperform” and “buy” respectively.
And the financial sector is a mixed bag of data as seen with JP Morgan’s reported earnings …
In a remarkable rebound from the depths of the financial crisis, JPMorgan earned $11.7 billion last year, more than double its profit in 2008 … The bank earned $3.3 billion in the fourth quarter alone … But not all the news from JPMorgan Chase was good … Chase’s consumer businesses are still hemorrhaging money. Chase Card Services … lost $2.23 billion in 2009 and is unlikely to turn a profit this year. Chase retail services eked out a $97 million profit for 2009, though it posted a $399 million loss in the fourth quarter. To try to stop the bleeding, the bank agreed to modify about 600,000 mortgages.
My point is this. As traders and investors, we must look at current data and make our decisions based on what we know now, our understanding of the current historical context. True, historical patterns repeat, but as with any pattern, probability determines when and where that repetition will occur. Nothing is certain and everything is random. The best we can hope for is an educated guess, which, my friends, is all you need to succeed in the markets. You see, history is huge, expansive, and comprehensive, whereas “the moment” is tiny, reserved, focused, and it is in the details of the moment when we decide to buy or sell. And in that focused moment, what happened in 1929, 1970, 1982, 2001, or 2008, is irrelevant because the question any trader or investor asks before pulling the trigger is where is this market headed now, tomorrow, next month, or next year. The answer derives from the facts he or she knows about the moment, not from the facts of the past.
So, 2010 will be like no other year in the markets. Small caps, technology, and the financial industry will behave according to the influences exerted upon them now, and those influences are out in the open for all to see. Which way will these and other markets flow? Every day I produce an educated guess, and when the time comes, whether it be the end of the day or the end of the year, I will know if I guessed correctly.
