"As the S&P 500 goes in January, so goes the year." If you're a Stock Trader's Almanac reader, you'll be familiar with this adage. According to the Almanac, since 1950, this seasonal indicator has registered 12 major errors. That's an 83.3% accuracy ratio. Given that 2023 is a pre-election year, another point to keep in mind is that, in 15 of the last 18 pre-election years, the full year followed January's direction.
It looks like the Almanac's expectations are on track for January, which could mean a positive stock market performance in 2023. After a dismal 2022, January's performance has injected a dose of optimism into the markets. The S&P 500 index ($SPX) is up 6.17% in January, and S&P 500 stocks have displayed strong performance—Tesla (TSLA), Amazon (AMZN), Apple (AAPL), and Nvidia (NVDA), to name a few.
The January Indicator Trifecta
Even though nothing is certain about the stock market, when all three of the January indicators check out, it adds a bit of comfort in terms of investor sentiment. We had a Santa Claus rally in the last five trading days in December and the first two trading days in January. It was a mild rally, but a rally, nonetheless. January's First Five Days were up and the January Barometer was positive.
Jeffrey Hirsch, Editor in Chief of the Stock Trader's Almanac, noted in a tweet that, when all three January indicators are up, the next 11 months are up 87.1% of times. That's a significant probability. Does it mean you can sit back, relax, and adopt a buy-and-hold strategy where you can watch your returns grow? If you've been trading for a while, you know that's never the case. There's always a chance that we could see a selloff during the next 11 months. Any unforeseen event could bring increased volatility to the markets, which is something you have to be prepared for, always.
Sector Plays
Looking at sector performance in January, topping the list is Consumer Discretionary, up 8.76% followed by Communication Services, which was up 8.60%. Looks like risk-on trading may be coming back to the table.
CHART 1: JANUARY S&P SECTOR PERFORMANCE. Top of the list is Consumer Discretionary, followed by Communication Services. Chart source: StockCharts.com. For illustrative purposes only.
The ratio of Consumer Discretionary to Consumer Staples (see chart below) indicates that Discretionary is outperforming Staples, which suggests that, for now, investors are leaning towards more offensive strategies. Why? A lot of it may have to do with investor expectations. Earnings season is underway and expectations are low. So, even though earnings have been lukewarm, investors aren't rushing to sell their holdings. There's also a Fed meeting going on and investors are complacent with the idea of a soft landing. The CBOE Volatility Index ($VIX) has been trading below 20, which supports investor complacency.
CHART 2: CONSUMER DISCRETIONARY VS. CONSUMER STAPLES. When Consumer Discretionary stocks are outperforming Consumer Staples, it's an indication that investors are leaning toward risk-on trading.Chart source: StockCharts.com. For illustrative purposes only.
Technology stocks have bounced back after getting beaten up in 2022. The Nasdaq Composite ($COMPQ) is up over 10% in January. Interestingly, small-cap stocks are also on the rise, as indicated by the S&P 600 Small Cap index ($SML).
What Should You Watch Going Forward?
According to Hirsch, in pre-election years, February tends to be stronger than average years, and the Nasdaq tends to be the best-performing index, with the Russell 2000 being the second-best. Given that technology stocks and small-cap stocks ended January on a strong note, there's a chance the trend may continue in February.
On the StockCharts platform, review the Market Summary on a regular basis. Going into February, pay special attention to the Nasdaq Composite and the S&P 600 Small Cap index. Stocks in these indexes could perform well if things pan out as laid out in the Almanac. Remember, markets are seasonal. Any signs of a reversal in a specific area of the market could mean another area is getting ready to take over. Recognizing changes in trends and capitalizing on them is what technical analysis is all about.
Regular monitoring of sector and industry performance via the Sector Summary and Market Summary tools can go a long way in helping you make your investment decisions. Set up Your Dashboard so it gives you a big-picture view of the market so you can easily see when changes are taking place in the market. Add the Stock Trader's Almanac 2023 to the mix, and you'll be armed to plan your trades for the rest of the year.
Happy charting!
