We might see a slowdown in January

Seasonal reasons for a softer January

Above is a month by month seasonal chart for the S&P 500 from 2009 to the end of 2019. The chart shows us how often the SPX has a positive return in each month over that 11 year history. If you go back further, much of the same pattern exists with a few variations. One consistent seems to be January. Over the long term, January is a pretty unpredictable month. It makes or loses money without too much bias to either outcome. Contrast that with April, where the SPX has made positive returns very consistently – seen on longer termed horizons as well.

Technical reasons for a softer January

I’ve been working on my new book on contrarian investment strategies. One of the more basic indicators I am covering is the angle of ascent or decline of a recent move when compared to the historic angles. A steeper than normal angle of ascent is much like any sentiment indicator, in that it can signal irrational exuberance by the crowd. Since March, we have a fairly parabolic looking chart on the SPX. The chart below illustrates this extreme angle of ascent. Markets tend to regress a bit when investors find even the smallest reason to take profits after such a move. I’ve marked some of these sharper than normal moves (up or down) on the chart with small black trendlines. Note the resulting reversals. I’ve circled 3 times where the market was also ahead of its 200 day SMA by more than 10%. The combination of a parabolic chart that’s currently 15% over that moving average can increase the potential for a correction. That’s where we are now.

Another sign that Dumb Money is in control

I read a funny line by one analyst who was trying to describe the influence of Robinhood Investors on the market (small retail accounts, usually consisting of relatively inexperienced investors who trade less quantitatively). He said “The inmates are in charge of the asylum'”. Too funny. Below is one sign that the inmates may indeed be running the the asylum of the recent parabolic market.

Sentimentrader.com has segregated small traders with opening positions to create a retail-investor influenced reading of the put/call ratio. I’ve posted their entire data file on this indictor, which goes back to 2000. The left side of the chart shows us that these investors were aggressively under-buying puts vs. calls in the late 1990’s technology bubble market. The low line on the chart illustrates this tendency. While this imbalance lasted a few years, it ultimately resulted in the massive crash of 2001. Of course, right when the market had bottomed in 2002, these small options traders bought protective puts aggressively.

The indicator can be better utilized when looking at neartermed market movements by the depth of its moves. Whereas a prolonged period of low put/call ratio by these folks can eventually lead into a crash as it did in 2001 and 2008, the indicator can also point to minor moves when it gets too deep, or too high. Right now, the indicator is fairly deep into complacency territory. That doesn’t suggest a market crash. But when we add it to the factors noted above, it might just provide enough evidence to remain a little cautious in the coming weeks.


  • Hi Keith,

    If the market will go down 10% in the first quarter, do you think the Canadian dollar also will go down and how far?
    I really appreciated your feed back. Happy X-mas to you and stay safe.


    • Sam–the C$ is not related to the stock market, at least not directly. More to the economy, debt/ credit ratings, and interest rates – plus relative valuations vs. other currencies – particularly the USD

  • Keith, I get the ‘relatively inexperienced’ part but aren’t we all ‘quants’? I’ve heard interviews with analysts of one branch or another and they all eventually cross the line and say things that are from another analytical style. I don’t just look at charts, I also consider what fundamental analysts have to say while also taking in everything going on in the world. So, if you are saying that inexperienced investors don’t consider ‘quantitative’ input, I’m not quite sure I would agree with that. I’m not inexperienced but are you suggesting that anyone with minimal experience in markets is now trading and is simply focused on hourly pricing?

    Given that, it has been written that the ‘inexperienced’ investor is the one who was buying in the March/April lows while the ‘pros’ missed it. That’s generalizing of course, but I think you get my point.

    • Ralph–the fact that you read this blog and read fundamental reports and take into consideration other analytics on your decision making implies that you are NOT the investor that the analyst was referring to. In other words, you sound like you have a head on your shoulders. I believe we are talking about somebody who was not an investor during either the 2000 or the 2008 crashes – OR – somebody who hasn’t studied historical market moves even if they weren’t investing then. The Robinhood investor he refers to is anticipating and is used to markets being bullish in trend with relatively quick reversals on pullbacks. He/she anticipates more of the same, with little regard for history or deeper analytics beyond conceptual investing. That type of person tends to NOT do any of the research you mention you do. And, according to analysts I associate with, they are the bigger force behind the tech stock rage than more seasoned investors. Guys like you and I are out there, but there are more of “them” than us…

  • I view inexperienced investors as “news headline investors”. They don’t dig deeper to study market data trends or charts. And then they try and pass on their knowledge to others. It’s valuable to listen to them and do the opposite of what they recommend.

  • Yea, I really don’t get the trading mentality of ‘them’. Happy to be an ‘us’. Enjoy your blogs and perspectives. For the record, I’ve been in the markets since before ’87. Learned many lessons back then.


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