The January Effect:

Whenever you hear an “expert” explaining the January Effect to be one of those, “as January goes – so goes the year” rules – run away. The January Effect is in reality the bullish tendency of the smaller companies (the Russell 2000) to out perform the large companies (the Dow or the S&P500) during the month of January. This important signal – thanks to the Stock Trader’s Almanac – is somewhat based on bullish investors biding up the economy sensitive smaller companies as we begin the New Year.

The “as January goes – so goes the year” thing is actually the January Barometer which relies mostly on the first trading week of the New Year. The January Barometer follows the Santa Claus rally which runs from Christmas into the first two trading days of January.

Our chart displays the three seasonal events in order of appearance. Note the Santa Clause rally was a bust. Secondly the January Barometer gave us a negative signal. So now we have to see if we get a bullish January Effect – which means we need the Russell 2000 to out perform the S&P500 through January. So far a simple spread is giving us another negative signal.