Randall Forsyth’s latest negative contribution to Barron’s (February 1, 2014) makes me wonder exactly what pool of market opinion he has been sampling. “January Goes Off the Script” poses the question: “Does a rocky start for the year spell doom for stocks in 2014?” I particularly like Forsyth’s loaded verbiage (i.e. DOOM) . The article posits, “So far in 2014, not much is playing to script. Contrary to all investor’s expectations coming into the year, stocks have taken hits, while bond yields have fallen sharply.” Now, contrary to Randall’s view, most of the people that I talk to, as well as the media, were on the look-out for the inevitable, overdue correction (the ‘fear trade’ into bonds would be an expected consequence). Ergo, the month of January should not be a surprise to anyone. It may be the beginning of that correction.
The January Indicator
“The January Indicator” is defined in “January Goes Off Script.” “According to the Stock Trader’s Almanac, authored by Jeffrey and Yale Hirsch, January has called the tune for the year some 88.9% of the time since 1950.” Forsyth went on the list the big misses: “1966 and 1968, which they (the Hirsch’s) write were affected by the Vietnam War; in 1982, a major bull market began in August…” This last part about 1982 caught my attention, because I believe 2013 and 1982 have some interesting common characteristics.
Like 1982, in 2013 the S&P 500 broke out to new, all-time highs after over a decade of treading water, sometimes collapsing severely, a la 2008/2009. In the bear that bottomed in 1974 that collapse was slower, but very severe from a closing high of 120.24 (1/11/1973) to a closing low of 62.28 (10/3/1974), 21 months and almost 50% off the highs. September 10, 1982, the S&P made a new, all-time closing high of 120.29…this, even though January that year was a down month. The index ended the year at 140.4, up 20%, and nobody believed it. It was the beginning of a bull run that finished in March of 2000 with the S&P closing at 1527.35, a ten-bagger!
What about 2000 to 2013? This flat period (of course with significant ups and downs under the 2000 peak) began March 24, 2000 with the S&P at a closing all-time high of 1527.35. This was briefly eclipsed 10/9/2007 by a reading at 1565,47. Then we went back into the tank, eventually to 666 in March of 2009. April 23, 2013 the S&P finally closed at 1578.35 and we were off to the races with the index trading as high as 1848.36 on January 15, 2014. We have been up as much as 17% from the previous thirteen year trading-range high and, like 1982, NOBODY believes it…including Mr. Forsyth (who just may have given us a perfect comparable vis a vis the 1982 break out).
Yes, the fundamentals of the two periods were completely different; but, the doubt, fear and skepticism are exactly the same. Back then we were trying to kill inflation with 15 to 20% interest rates. Now we are trying to stir up inflation (growth) with a 2.66% ten-year U.S. Treasury.
As always, past performance is no guarantee of future results, but the price action of these two markets offer some interesting food for thought.
A circumspect look at The January Indicator
Since the January Indicator ‘flashing negative’ has become a media hot topic, I though a look at a more reasoned approach to the topic might be useful. Mark Hulbert, founder of the Hulbert Financial Digest, is a source that I have referred to in the past as level headed, a clear thinker. Hulbert’s “Don’t dump stocks just because January was a loss,” gives us a more guarded view of the value of this timing tool. It is worth a look, if the countless negative references to The January Indicator have you scratching your head. It also makes Randall Forsyth’s “DOOM” reference look really silly.
What do you think?
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