Tags: Diamonds (DIA), Spiders (SPY), NYSE Euronext (NYX), NASDAQ (NDAQ)
9 am ET…January 24…2008 — The Big Picture, in Sharper Focus
The January Effect… for GARP Investors
A number of investment theories proliferate at this time of year…though after this month’s volatile market and steady decline, the January Effect provides a reasonably reliable barometer. The prevailing theory is “How goes January, so goes the year”. A corollary states that it is really the first five trading days that serves as a harbinger of the year.
Either way, one or both of these measures have applied for each of the past ten Januaries… whether it meant an up or down year. For example, the last time both measures correlated, each was up and the change for the year was 16% in the same direction. In 7 of the past ten years, the month end January has correctly foretold the direction of the market by year end, at least as measured by the Dow Jones Average.
With an average change of 10% over the last ten years, this translates into a forecast of the Dow at 11,900 (2007’s close of 13,265 less 10%). This means if the Dow is down by the end of January, which is likely based on the January Effect, it will close down for the year in general, and a reasonable forecast would be 11,900. The table following illustrates the raw data.
Relating this to our Presidential Rankings table (click here for link to that article)…this results in a gain in the Dow while Bush was in office of 12%, placing him in a tie for 14th place with John F. Kennedy. Of course, there will still be another 20 days until inauguration of the next President. The next milestone for Bush is Jimmy Carter’s Presidency, # 15, during whose Administration, the Dow fell 1%. That would be a Dow of 10,500 or about 2,700 points lower than today.
This needs not be a profitless forecast for investors, however. Diamonds (DIA: $122.19), Spiders (SPY: $133.04), NYSE Euronext (NYX: $75.65) and the Nasdaq Stock Market (NDAQ: $42.98) are all possible trading vehicles to express your investment point-of-view, and each moves in a tandem direction with market sentiment. The following graph illustrates —
The above acronym, GARP, stands for Growth at Reasonable Price. Not much has been written about GARP lately. This is likely to change. Bear markets, as the one we are in, are about the only time an investor can find a bargain. That’s when value is created. To paraphrase Donald Trump, ‘your profit is based on where you buy, not where you sell’.
The challenge, of course, is developing some criteria to help assure the bargain you’ve spotted doesn’t turn into a long term loss.
Let us hear your thoughts below: