A Positive TSX January Effect:

The January Effect is 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.

When the study is applied to our own TSX our chart displays a bullish January Effect in Canada (so far) – which means the S&P/TSX Small Cap is out performing the large cap S&P/TSX60 index through January 24 as measured by a simple spread. The TSX Small Cap index is typically reflects the performance of the smaller and risky energy, materials and industrials – such as biotech, technology, mining and oil & gas producers.

A Positive January Effect:

A few posts ago I expressed annoyance with “experts” who explained the January Effect to be one of those, “as January goes – so goes the year” rules – which is incorrect. 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 market direction during the first trading week of the New Year.

Our chart displays a bullish January Effect in the US (so far) – which means the Russell 2000 is out performing the S&P500 through January 21 as measured by a simple spread. In our local TSX we also have the S&P/TSX Small Cap index out performing the large cap S&P/TSX60 index.

Sector Rotation – Alive and Well

Just to review – the natural order of sector rotation

Leading Stock Sectors - Financial, Utilities & Telecom

Coincident - Consumer, Health Care, Industrial & Technology

Lagging Stock Sectors - Energy & Materials

On a recent appearance on BNN (December 31, 2013), I displayed a table that set out the one-year change in the top four sectors of the TSX Composite along with the following text, “The haves and the have-nots: For the TSX in 2013 it was a year for stock picking --- due to the haves and have-nots. Note the table displaying the top four TSX sectors by weight change through 2013. As a group they total about 80% of the TSX Composite. As we can see the big capitalization winner was the financials and the big loser was the materials sector.”

So far this year the TSX Materials ETF clone (XMA) is up 7.9% (12-trading days) and the TSX Financials clone (XFN) is up only 0.4% - so there are likely four reasons for the materials strong outperform over the financials.

1) The weak Canadian dollar – good for exports.

2) Brutal tax-loss selling of the sector in late December

3) Likely an improving global economy

4) Portfolio re-balancing by portfolio manages who reduce over-weight sectors and add to under weight sectors.