Timing of the January Effect

History has taught us that the first week of January many times can give us an indication of how the market will perform for the year. This is known as the January Effect

There are many schools of thought behind this investment theory but probably the main engine for this type of forecasting logic, is that fund managers and investors take new positions after clearing out other positions at the end of the prior year for tax loss and performance reporting purposes.

For purposes of this post, we will take a look at a daily chart of the ETF, (DIA), which tracks the performance of the Dow Jones Industrial Average. The basic indicators shown are the 50 and 200 Day Moving Averages, along with a linear regression channel set at 1 and 2 standard deviations, and finally a trend line drawn from the November low. The reason for looking at the ETF is that we can get a better sense of volume levels as displayed along the bottom.

As displayed in the chart, we can see the Dow is at a major resistance level as marked at 90.82, Representing the December high and January 1st, yesterday’s action. This resistance is also marked by the upper band of the one standard deviation linear regression channel.

Another healthy sign is that the Dow broke through the 50 Day Moving Average from the November low and this is a level we have not seen for the last several months.

We are at key 30 day resistance level and today’s market action at one point gave up half the prior day’s gains. Certainly if we can take out that level in the next three days, than the January effect theory would be forecasting a healthy 2009 for investors.

What I believe makes this year different for this January barometer from a timing perspective, is the massacre selloff we experienced in the last few months as well as the realization this bear market has lasted almost 14 months which is a little more than the average time for bear markets but certainly a better opportunity to invest for a higher market later this year .

I see this market rising over the next few weeks as weaker earnings seem to have already been priced in the market and the new administration takes office giving us a clearer picture of the plan to get our economy moving again.

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Past performance is no guarantee of future results.