The 'Average' January Market - Cause For a Pause Happy New Year! But, now it's time to get back to work if we want to make some big money in 2009.  I don't know if you've noticed this or not, but the month of January over the last several years has been, shall we say an 'interesting' month? Aside from the so-called 'January Effect' vigil (which isn't necessarily a water-tight concept), the first month of the year has also been quite violent on most occasions.  Almost as often, we've seen a strong move very early in the month, and then a complete reversal for the majority of rest of the month.  Why? Let's face it - a clean slate inspires a lot of effort to fill it up again. It could be buying, or it could be selling. But, everyone tends to be anxious about starting a new year with a bang (i.e. a big winner). So, trading activity may be more than a little elevated when the calendar is freshly turned.  Given just how big the current month could be - good or bad - I think it's worth spending a little time to go back and study prior January action. We may be able to glean a clue about this year's January.    Prior January Charts Let's just take a quick look at prior Januarys, starting with the most recent and working our way back. January 2008  Right out of the gate there was no question about this one. It started bad, and got worse. From the open to the low we saw a 10.7% dip in the first three weeks of the year, and the selling was relentless. We saw a slight recovery in the last week of the year, but by that point the damage had been done... it was a 6.1% loss, and an omen of things to come. January of 2007  Not a great start, but a decent finish. Stocks drifted lower by about 1% during the first week of the year, but ended the month higher by 1.4%. However, the year ended with the market in a tailspin... on a crash course. This January was notably choppy, with six distinct changes in direction. This is the kind of environment in which there is no 'trend' to trade. January of 2006 Remember this one? The very first day of the year gave us a 1.6% gain, and we gained that same amount again over the next several days. Investors were elated. Just when the market was getting euphoric though, the buying spree ended and we gave a big chunk of that gain back. The last week of the year offset the pullback though, and we ended the month higher by 2.5%.  January of 2005  This year started bad, went to worse, but then went to just plain awful. The S&P 500 sank about 1% on the first day of trading, sank another 1.1% on the second day, and ultimately lost 4% before the bleeding stopped at the end of the third week. We got a little bit of that back in the last week, but the month was a net loser of 2.5%. January of 2004  Up, up and away. The bulls got started early this year, very well paced (though it's worth mentioning how the very first day of the year was a loser). The gain of 3.9% over the first three weeks of the year was diminished over the last week of the year. In the end though, the first month of 2004 handed over a net win of 1.8%.  January of 2003  This one should also be pretty memorable. The very first day of the year was a phenomenal 3.4% gainer. Two days later the market was up 5.7%. Wow! Then, it started to waffle.... and then it started to pull back.... and then it never stopped pulling back. When it was all said and done, we lost 2.7% that month. However, from the peak to the close we actually gave up 8.5%. What a painful swing. January of 2002 This was still during the last bear market, so we'd generally expect a pretty poor start to the year. Interestingly though, the year got started bullishly - the S&P 500 gained 2.1% over the first three days of the year. The bear market kicked in after that; we ended up losing 6.1% over the next three weeks. A 2.7% pop during the last two days of the month meant a monthly loss of only 1.5%, but what a roller coaster. January of 2001  If you think 2002's January would have made you seasick, then you may have forgotten about 2001's January. We were down sharply the first day, up even more on the second day, then down sharply the next three days... back to the lows from day one. Here's the really interesting part though - the rest of the month was nothing but steady gains, leading to a net win of 3.5% by January 31st. All was well, right? WRONG! The very first day of February was the beginning of a disaster. January of 2000  The bear market hadn't even started by this point, technically, though there were some tell-tale signs in retrospect. Over the course of the first two days of 2000 the S&P 500 lost 4.7%. We gained it all back within a couple of weeks, but by the time January came to a close we were underwater again, by 5.1%. We'd gain it all back - and more - in March, but it was the beginning of the end.   Conclusion So what? What's the point of the history lesson? There are a few.  First, the big lesson (I think) is to assume nothing, and to not dig in too deep. We saw strong reversals - and sometimes multiple reversals - for the majority of past Januarys. Trying to jump on the trend d'jour may have yielded poor results. In fact, it seems like the bigger the early move is, the more likely a reversal will be... if there's a reversal. (That's why it's important to make sure a reversal is in place if that's your strategy.)  The second lesson is just that the January Effect (the idea that how January goes, so goes the year) only works some of the time... not enough to rely on it for trading purposes. Of course the market's likely to be up for the year if it's up in January - it's supposed to go up all the time? To assign a cause/effect relationship or a correlation is not statistically significant, as it didn't even do work all that well.  The third and final point I'd like to make is that January can be unusually volatile. I'm not talking about all the likely reversals - I'm just talking about the massive swings that may come out of it, both up and down. It's not a month for the faint of heart, though if you're on the right side of any move it can reap huge rewards.  Anyway, just a little food for thought as we get the year rolling. Obviously I don't know what 2009's January will bring, but now we know about several of the possibilities. I'll be keeping tabs on this month's action in the blog so we can do a little compare-and-contrast later.