January Stock Market Barometer
Each year, toward the end of January, investors anxiously wait for the closing price to confirm the results of the January Barometer. According to the January Barometer, the market hypothesis states that if the stock market (SPX) closes up for January, then there is a good chance the year will end higher, above January’s gains by Dec 31st.
The large-cap index closed the first month of the year with gains of 6.18%, recording one of the better Januarys since 2019.
Does this imply 2023 will be a positive year for the stock market (SPX)?
Some investors suspect that individual investors and professional traders tend to sell losing positions before Dec 31st as they perform tax-loss harvesting and year-end window dressing to claim capital losses to offset capital gains. After completing this strategy toward year-end, investors and traders would buy back the previous year’s underperforming stocks in anticipation of outperformance in the ensuing year.
Other investors believe year-end bonuses can lead employees receiving the extra income at year-end will be pleasantly surprised, resulting in buying stocks during January.
Favorable market and investor sentiments occur at the beginning of the year. Optimism about the future can lead to a surge in buying during the new year.
The January Barometer also has many critics.
The press and media prominently reported on the January Barometer for many years, leading many traders and investors to be programmed to accept this market hypothesis as highly dependable and probable.
Others argue that the stock market is efficient and the January Barometer cannot sway the market as investors would anticipate this effect and buy stocks in January as others sold them in December, producing a net zero result.
Another criticism of the January Barometer rests with the theory that this market hypothesis does not provide any meaningful opportunities because it only represents small gains in January that is not enough to impact long-term returns. The transaction costs to implement this strategy wipe out the capital gains.
Many investors like following the January Barometer because it is simple and has defined results. While it is challenging to predict what will happen next month, let alone at the end of the year, proponents of the January Barometer believe the favorable momentum during the beginning of the year can help to propel stocks through the rest of the year.
Although there appears to be some truth to the January Barometer, it is no longer as pronounced as before. The proliferation of numerous electronic trading firms, high-frequency trading, technical-driven trading models, hedge funds, and computerized trading may have anticipated this trading phenomenon, neutralizing its significance and usefulness.
A quick review of the SPX sectors suggests January’s top-performing sectors concentrated within the economically sensitive and higher beta areas, including S&P Consumer Discretionary (XLY +8.95% MTD), Telecommunication Services (XLC +8.60%), Real Estate (XLRE + 3.74%), Technology (XLK +3.08%), Materials (XLB +2.80%), and Financials (XLF +0.73%). The laggards for the month are the defensive and low-beta sectors such as Utilities (XLU -8.18%), Healthcare (XLV -8.01%), Staples (XLP -7.26%), Energy (XLE -3.36%), and Industrials (XLU -2.47%).
Upon further review, the January 2023 S&P sector performances are the exact opposite of the 2022 YTD S&P sector performances. The leading S&P sectors are Energy (XLE +84.39% YTD), Utilities (XLU +21.45%), Staples (XLP +19.52%), Healthcare (XLV +17.16%), Industrials (XLU + 14.149%), Financials (XLF +8.90%), Materials (XLB +7.75%). The lagging S&P sectors are Communication Services (XLC -18.84% YTD), Consumer Discretionary (XLY -16.77%), Technology (XLY -8.42%), and Real Estate (XLRE -6.44%).
It brings up an interesting question. Are tax-loss harvesting and year-end window dressing one of the primary reasons for last year’s lagging sectors rebounding sharply to start the new year?
Or is the strength from the cyclical and higher beta S&P sectors signaling the worse of the 2022 bear decline is over as investors discount a soft landing?
It will be interesting to see if the momentum sustains in the S&P Consumer Discretionary and Technology over the next few months.
Or is this another oversold rally within a primary downtrend?