What The January Effect May Mean For The Rest Of 2014

As the market begins February in the red, there is very little mention of the potential negative long-term implications of the market’s weak performance in January. When the market has a strong performance for the month, it is always noted. However, when the market post a steep decline, it is hardly mentioned.

Unfortunately, investors become complacent as the markets rally and are unwilling to take action when the they provide warning signals to a decline.

The S&P 500 SPY, off nearly 3.5 percent in January, may imply a decline of over 40 percent for the year. However, the likelihood of that much of a decline is remote.

Also, short-sellers, which have been abused over the last few years, will take advantage of any pullbacks to exit positions. That coupled with the “buy the dip” crowd will cushion the decline and the worst case scenario will be based on the math from the January effect.

For most of January, the index traded in a small range. Excluding the low from January 13, the index was confined to a roughly thirty point trading range between 1820 and 1850. Interestingly, the intraday rally on January 21 came within a hair of the December 31 all-time high (1849.44) and only two days later the index breached the lower end of the nauseating trading range.

After breaching the lower end of the trading range, the index attempted to find a bottom to rally from, but has been unsuccessful. Including Monday’s trading, the index has sliced through series of lows forming near 1770 and has yet to stabilize as it approaches 1755.

The sector that was supposed to lead the market higher in 2014 is in shambles and showing no signs of recovery. While the Street was banking on the financials to lead the market higher, the sector has been leading the move lower.

Perhaps the turning point was on January 15, when Bank of America BAC posted better than expected earnings and rallied to a three and half year high of 17.42. The optimism from the earnings release propelled the index to the upper end of the trading range.

From that level, Bank of America shares declined nearly a point and a half to the 16.00 level and the index followed suit. Bank of America rebounded to the 17.00 level, but has reversed course and is trading nearly a point from its high following its rally to 17.42 at 16.50.

Another financial to release stellar earnings was Goldman Sachs GS, which resulted in the issue cascading from 175.00 to 160.00. Even more worrisome was that investors utilized the upgrade from Guggenheim on Monday to dump the stock. After trading higher for the entire premarket session, the issue opened at its high for the day (165.32) and has fallen four points to its lowest level since November 20, when it bottomed at 161.20.

Several other financials have met similar fates, although poor earnings were the drivers in of a few of the issues. For example, Citigroup C shares, which had fallen from 55.00 to 51.00 before earnings, has shed another four points and is trading at its lowest level since July 2013.

If the index was to follow a similar path, the “buy the dip” crowd may want to sit tight and wait for a decline to 1600, another 150 points from its current level to put money to work.

Finally, the primary driver for the market during its extended rally has been quantitative easing by the Fed. Now that the central bank has turned off the spigot and began to taper, investors can no longer rely on the Fed to come to the rescue and bail out their portfolio.

With the January effect not delivering a favorable outlook for the year, it may finally be the time for investors to abandon the “buy the dip” banter and finally begin to “sell the dip.”