What Do The Cycles Say About January 2014?

For anyone still dazed and/or confused as to why the S&P 500 SPY was up nearly 30 percent in 2013, the slogan from Bill Clinton's 1992 presidential campaign sums it up nicely.

Although the first iteration of the now familiar phrase appeared to be spoken off the cuff at the time, "It's the economy, stupid," became James Carville's most famous words.

In this case though, it wasn't about the "state" of the economy, which was deemed to be quite dour at the beginning of the year in 2013. No, it is important to understand that it was the "outlook" for the economy that really drove stock prices in 2013.

Despite investors' early concerns over the fiscal cliff, the sequestration cuts, the slowdown in places like China, and then later in the year the government shutdown and the Fed's taper, the rally in the stock market was truly remarkable in many ways. For example, one of the keys to 2013 was the fact that the S&P 500's daily volatility was the lowest since 2006. As such, investors only had to deal with one correction of at least 5 percent - the least since 1995.

See also: The 13 Things Investors Learned in 2013 - Part III

In terms of returns, the 29.6 percent gain for the S&P 500 index was not only the best since 1997, but also the 11th-best year since 1926. Impressive.

Enough Already, It's Time To Move On!

Okay, enough about 2013, right? It's time to move on and deal with what is turning out to be the worst start to a calendar year in a decade. Yep, that's right; despite the brutal stock market decline of 2008, this is the worst start to a year so far since 2005.

And since this is not at all what the pundits had been predicting, we figured it was good time to review what the historical cycles look like for the first month of the new year.

Reviewing The Cycle Projections

As we've mentioned a time or twelve over the past year, cycle analysis should not be used in a vacuum or as a stand-alone indicator. In fact, there isn't any single indicator should be used in a vacuum - that's just basic, common sense. However, the cycle projections we follow remain an important part of both our daily and weekly Market Environment models and as such, we want to keep everyone up to speed on this work.

For anyone new to this analysis, the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles - all going back to 1928.

Is The Market In Sync With The Cycle Projections?

The first step in the analysis of our cycle projections is to get a feel for whether or not the cycle projections are "on" or not at the present time. Looking at how the market acted relative to the cycle composite in December, it is interesting to note that the cycle composite pretty much "nailed it."

To be sure, there was a fair amount of hand-wringing over the taper and the Fed was really the focus during the vast majority of the month. However, Ben Bernanke's surprise statement that the FOMC was basically lowering the unemployment threshold and shifting its focus to inflation caused the market to act almost exactly as the cycles had projected.

See also: 2014 Planning: Buy Signals To Watch For

Some might call December's performance relative to the cycle projection pure luck. But, as is often said in this business, especially when using technical or chart analysis, it is what it is.

We also like to look at where the market is relative to where the cycle composite suggests it should be from a longer-term perspective. In this case, we like to overlay the performance of the S&P to the cycle using a four-year time frame.

In doing so, it is interesting to note the market is currently almost exactly where the cycle projection said it would be. Sure, the path over the last four years has varied a bit. Sometimes greatly so. But at the end of the day - and over a four year period - the cycle composite's projection has been eerily accurate!

January Tends To Be Strong Historically

Most investors are aware of the fact that the month of January tends to start strong and end strong. However, in looking at the pattern of all January's since 1900, it is clear that while the New Year tends to start off with a bang, there is usually a pullback in the middle of the month. However, history shows that all's well that ends well, as the early rally tends to resume before the calendar pages change.

What Does the January Cycle Look Like This Year?

The next step is to take a look at what the cycle composite's projection is calling for during the coming month. So here goes...

The Cycle Composite (the combination of the one-year, the four-year, and the ten-year cycles) suggests that January will be somewhat volatile, yet positive. Like the historical one-year seasonal pattern, the cycle composite says January should see an early rally, then a quick pullback in the middle of the month, followed by a decent rally into the end of the month.

But, spoiler alert: The beginning of February could be rough.

So, should investors begin to worry that instead of the traditional January joyride to the upside, they are instead seeing a bump-and-grind lower? Time will tell, of course. But, given the accuracy of the cycle composite lately, it is probably not a good idea to abandon ship just yet.

Remember, "it's the economy, stupid." And as long as the prospects for the economy continue to improve, the pullbacks in the stock market are likely to be short and sweet.

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