Morning Comment: Will the action in January really tell us anything?

There are many short-term “seasonal” plays that usually workout quite well for the stock market. For instance, the stock market usually does well around long weekends (especially Memorial Day weekend). It also usually rallies in the days surrounding Thanksgiving and at just after Christmas…the Santa Claus rally. (The former did not workout very well this year, but the later has…at least so far.) These “seasonalities” can be very helpful for short-term traders…and they can also help long-term investors decide when the want to be more aggressive in buying or selling their longer-term holdings.

However, the longer-term “seasonalities” tend to be much less helpful. They tend to be merely trivia. Just look at “sell in May and go away.” No, we’re not saying that “seasonality” has not been an accurate description of how the stock market acts from May until November in most years, but it’s not something investors should treat as more than just trivia. Let’s face it, the stock market had not done poorly from May to November in each of the last three years. In fact, it has rallied nicely…including a 27% rally in 2020!.....Thankfully, the fact that the stock market has rallied nicely during this time frame over the past three years has not hurt investors. They have looked at the situation they were facing at the time and stayed with their investment strategies.

We are now entering into January…which is another timeframe were some pundits extrapolate out what happens this month for the rest of the year. They highlight now there tends to the correlation between several different time frames from this month…and tell us that it’s a good indicator for the rest of the year. Some even sight the first day of trading as a strong indicator for the full year. More of them will talk about the first three days of trading (and/or the first week of trading) as a good longer-term indicator. Finally, many more will highlight that the month of January as a whole is a fabulous indictor for the rest of the year.

Don’t get us wrong, history DOES tell us that in most years, the stock market does frequently move in the same direction for a full year…as it did in the month of January of that year (but the early month comparisons are ridiculous.)…..However, we have to all ask ourselves whether we really care what happens in January…once we get past the first week of February? For instance, what if the stock market sees a sharp decline this January…but in June, they find the cure for cancer…and come up with a new energy source that will replace fossil fuels in just a couple of years (instead of a couple of decades). Do you think ANY investor will say to themselves, “Wait, the market fell sharply in the month of January, so instead of buying the market with both hands on this news, I’m going to sell, sell, sell!”………Of course not. In other words, when it comes to longer-term “seasonalities,” they are really more just pieces of trivia than anything else…and thus they should be ignored by investors.

Anyway, as we said in our weekend piece (and in other pieces in recent weeks), we worry that the stock market could/should face some important headwinds in 2022. We believe that inflation will remain a problem…and (more importantly), we believe that since the worlds two largest economies have moved from periods where they STRONGLY encouraged risk-taking, leverage and debt (in several different ways)…to a situation where their policies discourage these endeavors going forward…it will lead to a decline in today’s extremely expensive stock market as we move through the year.

HOWEVER, this does not mean that the stock market will start any pullback or correction immediately. A lot of new money comes into the marketplace at the beginning of the year. We’d also note, that institutional investors cannot afford to avoid being aggressive in the stock market if (repeat, IF) the market rallies early in the New Year……It all has to do with “performance fear” (and we’re not talking about the kind that can be cured with Viagra).

If an institutional investor (including hedge funds) believes that the stock market is going to have a LOUSY year in any new year, they still cannot afford to miss an early year rally. Therefore, they will buy the stock market with both hands if it gets off to a very strong start.

Institutional investors cannot afford to fall well behind the market in the first month of the year. If it’s rallying, they HAVE to go with it…NO MATTER what their longer-term opinion might be. If they act in a bearish manner early in the year…and they are wrong…they will spend the rest of the year trying to play catch-up. NO institutional investor likes to do that. In fact, they need to avoid it at all costs. Once they get off on the right foot in any given year, they can play around with their holdings in order to maximize their gains. However, at the beginning of the year, many active managers tend to be more like index funds than they’d like to admit. (Very simply, it’s good for job security.)

The futures are pointing to a higher opening this morning, but since this seems to be mostly fueled by some good news on one stock (TSLA), it does not tell us anything about how the market will act over the next few days…or the next few weeks. Therefore, the early morning gains are certainly nottelling that the market will definitely get off to a good start in January (at least not yet)…and thus it does not tell us that the above-mentioned scenario will play out…with institutions buying stock aggressively to start off the year.

However, if (repeat, IF) we do see some strong gains in the first week or two this year, it could indeed feed on itself through the rest of the month…….That said, we strongly believe that this will not tell us much (if anything) about how stocks will act for the full year. In fact, whether January is a strong month…or a weak one…we still expect some VERY tough stretches for the stock market during 2022….…..Don’t fight the Fed.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jan 03, 2022 — 9:01 AM
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