The January Effect

January 2023 can be summed up by one well known market event called the January Effect. Under normal market conditions, the January Effect usually only applies to stocks that performed very badly over the course of the prior year, which would be the stocks that performed the worst in 2022. We would usually be looking for the top 10 “dogs of the Dow”, or the top 10 “dogs of the NASDAQ” in order for us to compose our 20 best January Effect stocks. However, 2022 was a terrible year for all stocks universally. After a massive pandemic rally we had eight very strong pandemic pullbacks. As a result, 2022 was the first significant down year we’ve had since 2008. Fourteen years of market expansion, which was mainly caused by loose monetary policy, and the very favorable conditions caused by the Federal Reserve and Quantitative Easing.

What effectively happened this year is that the entire market experienced what usually only affects the worst performing stocks in the market. The entire market was deeply oversold after 2022. In fact, most fund managers do not want to send out year-end statements with them owning the biggest losers in the market. As a result, the fund managers sell them before the end of December so they are not included on year-end statements. This is called tax loss selling. They wash whatever gains they had by selling their biggest losers by the end of the year. They do not want to lose the bounce back that occurs in January, so they quickly buy those stocks back in January after they realize the tax loss, and wash whatever gains they may have booked during 2022. In 2023 this happened to the entire market!

The stocks that made the most exaggerated moves were the stocks that were beaten up the most, like Tesla ($TSLA) as  seen here in this chart.

Another stock to watch is Apple ($AAPL) as it makes up a large percentage of the indices. The markets and Apple are coming into previous resistance levels established before the last breakdown that occurred in November and early December. This resistance level will be key.

As we’ve indicated in previous newsletters, gold ($GLD) is hitting its prior resistance level and this is a good place to take profit if you entered at prior support. More than likely, the U.S. dollar will start to strengthen as the Federal Reserve continues to raise interest rates, which usually has a negative effect on gold. Finally, gold seasonally goes up during the holiday season into the Chinese New Year, which fell in January this year. That seasonal trade is now coming to an end, so this is a great time to take profit on an incredible move as indicated in the chart provided.

This January’s rally has provided some much-needed relief to the bulls, but I would say not to throw caution to the wind just yet as most likely, the market will head back down to its previous lows to retest support, as markets tend not to just bottom but they usually need to double bottom before resuming their previous trend direction. Trade well and be cautious as this rally might be running out of steam as it gets to resistance.

Written by Michael DiGioia, Director of Education
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