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Outlook ’09 – The January Effect

Optimistic investors are still hopeful that the year will end with a Santa Claus rally. But maybe it’s Jack Frost who can rescue investors?

Is Santa Coming?

Although the term Santa Claus rally is used loosely, it typically occurs in the last 5 days of the year and the first two weeks in January.

As we first told you Friday John Roque, Natixis Bleichroeder technical analyst anticipates the market could make gains through the end of the year. (Click here to see his analysis.)

However, Roque’s analysis sparked some – shall we say – skepticism.

Rick from NJ wrote, “Couldn't disagree more with your guest technical analyst. The charts I look at show the market unable to get more than 1000 points off its bottom and now beginning to roll over. I believe the third leg of the decline is imminent and we will see the first number of the DJIA be a "5" before a legitimate bottom is in.”

Welcome Jack Frost

According to Jeffrey Hirsch of the “Stock Traders Almanac” a Santa Claus rally might not be the right thing to hope for. Instead he’s got an eye on Jack Frost – the icon of January.

Why? Because in 31 of the last 36 years, a rally in January was followed by a full-year of gains.

“January is the first month of the year when people set their forecasts. And there’s the state of union address and important agendas laid out,” he says. All those things set the tone for the year.

He might be onto something. The January Effect is accurate 91% of the time.

Take a look.

Jan. Change Year Change

2004 +1.7% +9.0%
2005 -2.5% +3.0%
2006 +2.5% +13.6%
2007 +1.4% +3.5%
2008 -6.1% -40.31(YTD)

What’s the bottom line? As the S&P goes in January, so goes rest of year.


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Trader disclosure: On Dec. 24 th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Najarian Owns (AMR) And Is Short (AMR) Calls: Najarian Owns (MSFT): Najarian Owns (XHB) Calls: Finerman's Firm Owns (AEO): Finerman's Firm Owns (MSFT) And (MSFT) Put Spreads; Finerman's Firm Owns (OIH) Puts; Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (BBT), (COF), (USO); Finerman's Firm Owns (ROH) Call Spreads; Karabell Owns (AAPL), (GOOG), (JPM), (CSCO)

Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV)

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