Early Warning System & January Barometer

With the first five days of January officially in the books, the Early Warning System (EWS) pioneered by Yale Hirsch is flashing a positive sign for the rest of January as well as 2015. The theory says that as go the first five trading days of the new year, so goes January. And as goes January, so goes the year.

With help from my friend Carter Worth of Stern Agee (Carter did the heavy lifting and I peppered him with questions), he examined both the first five days as well as January since 1927. If the EWS was positive, there is a 76% chance that the whole year will be positive. If the EWS was negative, then the year was a 50/50 toss up.  Any random year has a 67% chance of being up. So right now, history says there is a 76% chance of 2015 being an up year.

Those stats alone seem valuable, but they left a big question unanswered for me. If the EWS was positive and then January was positive, how much did January’s return borrow or steal from the full year? Remember, we really don’t know the full results until January 31 and by that time, the stock market could already be substantially higher and potentially cannibalize the full year results.

After continuing to annoy my old friend Carter, we learned that when January is negative, the rest of the year is actually positive by an average of a paltry 1.6%. However, when January is positive, the rest of the year is also positive by an impressive 8.6%.

Although stocks began the year on a sour note, the bulls rose to life over the third, fourth and fifth days of the year to close the first five days marginally higher. As I type this, January is currently down less than 1%. The next three weeks are obviously key for this historical study in determining the outcome of 2015. After watching the Dow reach my longstanding 18,000 target, I am now patiently waiting for five consecutive closes above 18,000 to set the stage for a run to at least 20,000.

My own 2015 Fearless Forecast is being edited now and one thing is for sure, I do not see a repeat of 2014 in any asset class!

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Santa Claus Rally Just Around Corner

Big picture. Late October through mid January is the strongest seasonal period to invest in stocks. That’s fact.

Over a similar but slightly different period, the semiconductors are the strongest group to invest in. Just since the October bottom, they are up 27% and I am very glad we own them in our sector program. They made up for some crummy positions we have held during the same time.

Early December shows some slightly negative seasonal headwinds, like we are seeing now. In bull markets, these headwinds usually turn to tailwinds over the coming week.

The much maligned and beaten down Russell 2000 index of small cap stocks has its most favorable period right now through early January, one of the “January Effects”. Tuesday’s wide daily range in the Russell turned the index from breakdown mode to possible breakout mode next week or the week after.

The traditional year-end or Santa Claus rally often seen in bull markets is set up to begin shortly and take the Dow above my longstanding target of 18,000 with the likelihood that small and micro cap stocks finally show some outperformance in an otherwise crummy year for them. I would be concerned and question that scenario if the Russell 2000 closed below Tuesday’s low, roughly 2.5% lower from here.

There are always many crosscurrents in December and this year is no different with most of the market doing well, while the energy sector is under severe pressure. Tax loss selling in energy stocks is supposed to wrap shortly and that group should see at least a reflex rally, regardless of where it is going next year. At the same time, with so many portfolio managers trailing their benchmarks, it’s very difficult for the bears to make any headway until next year. Any 1-3% decline should be quickly gobbled up, especially in the sectors and stocks that have performed the best in 2014.

Like I said, lots of crosscurrents through year-end…

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