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Market Directions: Two Opinions About 2009 (Part II) Email Newsletter Business Opportunity - Helen Bairstow The January Effect? The Easiest way to do a Client Newsletter. Compulsory super is a train wreck in the making
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The January Effect?

Click here to buy - A How To Book of SMSF's by Tony Negline

Lester Wills

2009 was very welcome given that 2008 was a year that will go down in history, probably for all the wrong reasons. I still have vivid memories of October 1987 imprinted upon my brain as being in a dealing room on that fateful day meant I took part in history. I suspect that those involved with the markets during 2008 will say the same. I calculated some sobering statistics that really bring the point home.

During the year the Dow Jones Industrial Average was down over 44% at its worst, but recovered to be only down just under 39% for the year.

The Standard & Poors 500 Index was down just under 50% at its worst point (49.5% to be exact) but recovered to finish the year down 38.5%

The FTSE 100 index in London fell by just over 43% during the year but recovered to record a fall of just over 31% by year end.

The DAX in Germany fell just over 50% during 2008 but recovered to record a fall of marginally over 40% by the end of December.

The CAC 40 in France saw a loss of just over 49% during the year, recovering to a loss of almost 43% by years end.

In Australia, the All Ordinaries index fell by just over 50% at its worst point but recovered to record a loss of 43% for the year.

Given figures like that it is little wonder that pundits are suggesting it was the worst year since the Great depression.

But what now? How will 2009 shape up?

At this stage who knows, but I came across an interesting spin on forecasting recently. Namely the January Effect. Depending on what you read this is either a general increase in stock prices during the month of January often attributed to an increase in buying following tax loss selling in December.

Some limit the effect to the first week of January and some argue that whilst it relates to the entire month it is limited to small cap stocks only.

Whatever the exact definition, the argument suggests that if the month of January is positive, it is an indication that the rest of the year will be positive. Apparently, this has been observed on many previous occasions. Sounds good, but is there any evidence to suggest it is true?

Actually yes there is.

An article in the Journal of Finance details a study that looks at exactly this question. In the study, they updated evidence on the January effect in value-weighted returns between 1802 and 2004 and in equal-weighted returns for the period between 1927 and 2004. They discovered that when these broad samples of value-weighted and equal-weighted returns of U.S. equities were analyzed there was evidence of abnormally high rates of return on small-capitalization stocks during the month of January. Not only that, this January effect in small-cap stock returns appears to be remarkably consistent over time.

Anyone who has studied the efficient market hypothesis will tell that this should not happen, yet it does. As the authors note, more than 30 years after its discovery, the January effect remains a compelling riddle.

Given that at the time of writing the month of January is not over, I cannot look at the whole month, but, how was the first week of January?

As January started on a Thursday and many exchanges were closed on that day, using just Friday 2nd January 2009 does not seem appropriate, so I have used up until the close of business on Friday January 9th for this exercise.

Dow Jones Industrial -2.0%

S&P 500 -1.4%

FTSE 100 +0.3%

Nikkei Dow 225 -0.3%

Dax -0.6%

CAC +2.5%

All Ordinaries +0.6%

The above figures whilst not encouraging are not really definitive so I would suggest waiting until the end of the month for a clearer trend. However, given the sense of enthusiasm I am witnessing around the inauguration of the new President and his apparent determination to turn things round by making significant changes to the way things are done, I suspect that this year is going to be one where gains will be made but they will be hard won and could all too easily be lost. It is hard to put so much on Obama, but there is a definite need for significant change. So this could be one of those twists of fate where he could just be the right person at the right time. Only time will tell.

Meanwhile, I hope you are all enjoying your nice warm January. I am having to adjust to what has been called abnormally cold weather with temperatures going down to -15 Celsius, with the wind chill taking this as low as -23 Celsius. If you want any more details go to my Blog:

http://brock-expatblues.blogspot.com/

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