by Jason Bodner
January 14, 2025
It’s time for the January Effect – a little overtime, in fact. The January Effect is the theory that stock prices rise more in January than in other months. That would be a lovely outcome, but so far 2025 is not working out as expected. Los Angeles is dealing with catastrophic fires, with thousands of families losing their homes, while both the North and the South are in deep freeze. There’s a beef between the U.S. and Canada – and maybe Greenland, Panama, Mexico and other nations, too – and Nvidia’s CEO Jensen Huang splashed cold water on quantum computing stocks, sending them off a cliff. As I write this, all four major stock indexes are in the red for the year-to-date, so what gives? Where’s that “January effect”?
First things first. Let’s look at the major stock market indexes going back to 1990: Only 20 of 35 Januarys (57%) since then showed positive returns for the S&P 500 – just four out of seven. Compare that to November, which was positive 74% of the time. Perhaps the January effect isn’t really something to rely on. As we can see below, January is flat in the Dow, and only up 0.3% in the S&P and Russell 2000. The only sign of life among the four major indexes is in the NASDAQ Composite (averaging +1.67%):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next, let’s visualize these facts in another way. Here is a graph of average monthly returns since 1990, using the same data. We can see that maybe we shouldn’t expect all that much from Januarys after all…
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, with our expectations dutifully adjusted downward, we need to check in on our trusty Big Money Index (BMI), our 25-day moving average of all unusually large buying and selling by the biggest traders. When the amber line rises, money is moving into stocks, and when it falls, money is moving out.
The downtrend seems headed towards oversold territory:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The good news about any oversold market is that the odds are excellent for a big rally coming out of oversold. Here is a summary of oversold periods and their forward returns in the S&P 500:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Except for the 2000-02 and 2007-09 bear markets, long-term gains are exceptional. Even with those big drags, the odds are well above 80% for gains after six months. The bad news about being oversold, however, is that it nearly always reflects an ugly gut-wrenching market that can feel very uncomfortable.
But before we get carried away fearing a big washout in the near future, let’s look at what’s driving that BMI lower. The first thing we notice is that, up to last Friday, the BMI wasn’t falling because of recent immense selling. The BMI was mainly down due to the lack of new buying. In the charts of both stocks and ETFs, we see heavy selling in December and low buying since then:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is a key point, because the way the BMI is calculated reflects the net unusual buying and selling over 25 trading days. And because late December’s selling was so intense, it continues to drag down the BMI. (If there were buying to balance it out, the BMI wouldn’t be falling so quickly).
It is also worth noting that the number of unusually large trading signals peaked during that bout of selling. Signal counts are just starting to approach the average, without heavy selling:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
On Friday, we saw a 259-sell day. For context, the daily average of sells since 1990 is 36. Even with the increased volume of the last 10 years, the average daily sells since 2015 is 54, so Friday saw nearly five-times the last decade’s average. For that reason, I went back to look at forward returns after all the days since 1990 that saw 259 sells or more. I found 164 instances out of 8,797 trading days – or just under 2% of the time – so selling like this is rare. The forward returns for stocks, however, are quite encouraging:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All this is to say that I’m not ready to sound any alarm bells – yet. I‘m also not dismissing the possibility of going into oversold territory, perhaps soon. The odds are certainly higher after Friday’s ugly action.
Right now, it is most crucial to monitor selling. If Friday was a “capitulation day,” we will see signs in the data. We are entering earnings season this week, so I expect volatility, but with the trend of companies beating estimates, history suggests a higher likelihood of more up volatility than down. According to data collected from FactSet Earnings Insights, odds are near 75% that companies will beat earnings estimates:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next up, we should dig into the sector level data to see if anything jumps out:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The main thing I see in this survey of the 11 S&P sectors is that the elevated selling is concentrated in the interest-rate-sensitive stocks, namely Utilities, Staples, and Real Estate: Each saw the brunt of the recent distribution. This is clearly another market freakout over rates, the prevailing thorn in the side of stocks.
Let me assure you that rates will continue to fall as inflation falls. Our next CPI report is coming out tomorrow, January 15th, so we will get short-term clarity, but the long-term trend is still downward, despite the CPI’s recent uptick. Either way, the effective Fed funds rate is well above the CPI:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The selling we’ve seen in Real Estate is echoed in year-to-date activity seen below… Real Estate is the #1 sold sector since January 1. Meanwhile, Technology is seeing the most buying, which is a positive:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here’s the game plan for now:
- If we see a continuation of intense selling, that just means we are getting closer to being oversold. If things stay how they have been, oversold is coming soon, as soon as Monday, January 20th.
- If earnings surprises continue their historical pattern of positive surprises (“beats”) and companies give rosy guidance, this weak start to the year could reverse quickly.
- Either way, this gives us a great opportunity to hone our buy lists as stocks are trading lower. Sale prices don’t come around very often, so look to identify great stocks going on sale! My plan is to comb through my lists of highest-ranked stocks in a recent decline in their technical scores.
Stick to the plan.
Concerning New Year’s resolutions, you may have broken some of them already, so take consolation from what Marcel Proust said: “It is always during a passing state of mind that we make lasting resolutions.”
Navellier & Associates owns Nvidia Corp (NVDA), in managed accounts. Jason Bodner owns Nvidia Corp (NVDA), in a personal account.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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