Planet Yelnick

Rally or Trap?

The market has rallied modestly for two days. It appears very oversold. The S&P gapped down several days ago, and some technical analysts expect it to cover the gap, which would mean lots more upside to this rally. Yet, this rally is fairly feeble and in the S&P looks like the final phases of an ending triangle. Accordingly, the STU predicts a final leg of the rally this morning, followed by a reversal that should be sharp - wave iii of (iii) down. Interesting, the Gann analysts expected a three day rally, which means Thursday (today) could be it. The most bullish of the Elliotticans, such as The Elliottician, think we are still in a longer term uptrend, but have not yet given the call to jump into this rally. Accordingly, consensus is to watch today and see if the rally sputters, which suggests a sharp wave iii down to follow; or if it closes the gap at SP1184, which suggests that the rally will continue into the first week of Feb. THAT would set up the question of the January Effect, if the rally could carry the whole month to a neutral or up period. So far this is one of the worst January markets on record.

January-Effect Watch: Week 3

January continues to sound dulcet tones for the market this year. The first three weeks have eradicated the market gains for all of 2004. It is typical of a change of trend for the market to remove very quickly what took a while to build. Hence we appear to be in the beginnings of a larger bear market period, rather than in a correction in a larger bull market.

January-Effect Watch: Week 2

Week 2 of our January Effect brought not just the expected reversal, but either three, or none. Confused? So was the market action. And given the market holiday on Monday, we will have to wait an extra day to find out what gives.

January-Effect Watch: Week 1

The first week of January is in, and the market tanked.  The first question swirling among the stock newsletters is whether the First Five Days of January is a predictor of the rest of the year.  A look back over 120 years says that the first five days does NOT give goods odds for the rest of the year.  The same analysis goes on to show that the an up month gives good odds of an up year, but that a down month is less useful a guide: whereas it does predict a down year, it is less predictive of a down next 11 months (ie with January taken out of the yearly calculation), which is more what a trader needs to consider in making decisions off statistics. 

We would prefer to follow waves not stats, but sometimes it makes sense to gamble.  The stat in question is that usually a Santa Rally is followed by a New Year's Skid, often after a pop up at the open (from buy orders coming in before the open - the lingering optimism of the Santa Rally).  That is indeed what happened: a pop at the open then a sharp drop.  In the Nasdaq, the drop removed in five days what the Santa Rally had created in five weeks.  The waves speak loudly: when a move in a new direction is faster than the old, and goes beyond the range of the old, it almost always denotes a change of trend. 

So what should we expect next week?

Dollar Days

We used to think micropayments were pennies on the Dollar, but with the way the Dollar is today, even 99c is considered a micropayment, according to a perspective in today's Sunday New York Times. And the way the Dollar goes in January may have a bigger predictive value than the January Effect.

January Effect

The January Effect describes an expected jump in January, supposedly due year-end selling of positions followed by buying them back in the new year. Indeed, studies show that 50% of the annual gains for small stocks occur in January. Consequently, January has predictive value: 83% of the time if January is up, so is the year. (If we look back to 1926, we still get 70% of the time, as goes January, so goes the year). The first week can also be looked at as a gauge for the year. Of course, gauges like this must be taken with a large amount of skepticism; Jan2000 was up strongly for the first three weeks, but marked the all time Dow high with larger drops to follow, and January has been a poor predictor of the next three years. This has caused pundits to say the Effect is dead. (As an aside, these sorts of statistical analyses with no underlying causality are highly suspect, especially when based on only a few years). What will this January bring?