There doesn’t seem to be anything in the way of the surging bull market as we go through the final week of the year, but some analysts warn that a sell-off could happen in January after the Santa rally in December.
“It might be better to get into some of the weaker sectors, like cannabis or some of the beaten-down IPOs like Uber, Beyond Meat and Slack or some of the energy names.”
So far this year the S&P 500 has gained 28.6%, and 8.3% of that came in the final quarter. If the index can manage another 1% gain in the final days of 2019, it will end up being the best year for the S&P 500 since gaining 31% in 1997. But that doesn’t mean January will see more of the same action.
“I suspect we’re going to cool the jets of bullishness in the first quarter. … It wouldn’t surprise me if we had a pullback,” Leuthold Group chief investment strategist James Paulsen said, according to CNBC.
A big reason for the pullback could be taxes, as investors try to trim their taxable gains.
“I think people won’t want to add any more taxable gains this year, so they’ll probably defer to next year,” Paulsen added. “They made a lot of money. A lot of them will tend to look at rebalancing.”
The January Effect in the Stock Market
Stock Trader’s Almanac Editor in Chief Jeffrey Hirsch is expecting some investors to rake in their profits from the remarkable run through 2019.
“That’s what gives a little bit of weakness on day one,” Hirsch said. “We’ve seen a bit of profit-taking on the first trading day of January when people don’t want to incur capital gains.”
January is traditionally a moment of weakness in the markets as well, and some Chicago futures traders coined the phrase “January break.”
Hirsch’s trading almanac also documents a phenomena called the January barometer, which speculates with 75% accuracy dating back to 1950, that January’s market action will determine how the rest of the year goes. The barometer has only missed the mark in a big way nine times, but Hirsch says 2020 is lining up for his so called January indicator trifecta, which could mean another up year in 2020, per CNBC:
That’s when there’s a positive Santa rally, which covers the final five trading days of one year and the first two of the next, a positive overall first five trading days of the year, and the January barometer is positive.
“The last 30 times, they were all up, the full year was up 27 out of 30 times,” Hirsch said.
As far as what may be a good play in the new year, Scott Redler, a partner at T3Live.com, said to look into weaker sectors.
“It might be better to get into some of the weaker sectors, like cannabis or some of the beaten-down IPOs like Uber, Beyond Meat and Slack or some of the energy names,” Redler said. “These could have the January type of effect … where selling pressure will lift and people who took losses in December, after 30 days, they can buy them back.
“The first two days of the year, you’re either actively trading or measuring your commitment levels to positions.”
It seems like no one saw the markets performing this well in 2019, so now we’ll just have to see if it can continue in 2020.