Will Seasonal Slump Drive Derisking?

Tyler Durden's picture

The so-called January-Effect is almost at an end and if the market closes near these levels, the S&P 500 will have managed a 4.4% gain or its 20th best January since 1928 (84 years) and best since 1997. The outperformance of banks and sovereigns (LTRO) and the worst-of-the-worst quality names (most-shorted Russell 3000 stocks +9% YTD vs Russell 3000 +5.2%), as Morgan Stanley noted recently, is not entirely surprising since the January effect is considerably larger in mid-cap and junk quality names than any other size or quality cohorts. We have pointed to the seasonal positives in high-yield credit and volatility and along with the obvious short squeeze in S&P futures (which has seen net spec shorts come back to balance recently), we, like MS, are concerned that the tailwinds of exuberance that virtuously reflect from seemingly pivotal securities (such as short-dated BTPs now or Greek Cash-CDS basis previously) very quickly revert to a sense of reality (earnings and outlook changes) and perhaps the slowing rally and rising volatility of the last few days is the start of that turbulence.

The most-shorted stocks (tracked by the red lines on the above chart) have dramatically outperformed the broad markets they are part of with the Russell 3000 most-shorted (thick red) massively outperforming (almost 400bps in the month!).

Morgan Stanley: January Effect

January is often a month for risk taking since optimistic investors believe that any underperformance during the month can be reversed by year-end.

In light of the sharp rally in the equity market thus far this year, we took some time to study the concept of a “January Effect.” Since 1901, the S&P 500 has averaged a 1.2% return during January with a standard variation of 4.3%. In the remaining eleven months of the year, the index has averaged a 0.5% monthly return with a 5.2% standard variation (Exhibit 2).

After accounting for the standard deviations, the return spread between January and the remaining eleven months is marginally statistically significant: With a T-stat of 1.73, it is significant at the 10%-level but insignificant at the 5%-level. In fact, 2012’s rally to date is only a 0.8 standard deviation event, and studying history, we would expect such a move to occur in slightly over 20% of January’s. We studied the “January Effect” by market cap cohort, quality-junk status, and value-growth status. Since 1970, the spread between the January return and the return for February through December has been highest in mid-cap stocks (Exhibit 3). None of the three cap cohort’s return spread is statistically significant—the mid-cap spread has the highest T-stat at 1.46. Year-to-date performance so far this year by cap cohort is consistent with smaller-cap outperformance.

We analyzed returns by quality cohort since 1981 and found that both quality and moderate quality, on average, perform worse in January than during the remainder of the year. Low quality slightly outperforms in January, while junk is by far the largest outperformer on average (Exhibit 4). The more positive performance of junk relative to the other quality quintiles is not surprising given that junk stocks are generally smaller than quality stocks, and the January effect is stronger in these small stocks. Still, none of the quality cohorts’ return spreads are statistically significant after accounting for volatility and the number of observations.

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Irish66's picture

bottom line, please?

HD's picture

Bottom line: Everything is bullish...until it isn't.

Bwahaha WAGFDSMB's picture

shorts have been on fire for a while but the much anticipated crash may be just around the corner.

Comay Mierda's picture

anyone who thinks the spx will crash in dollar terms is out of their mind.  the central banks will print an infinite fuckload of fiat bullshit to save the system at any cost.  spx will only crash if priced in gold and silver.  and that crash is coming very soon

JPM Hater001's picture

So Market Melt up and not devistating crash?

I fear you are right but think you are wrong.  The amount of money that floods out of the system would be a titlewave to the 0's and 1's of the Bernank.  And I'm not fooled.  The Fed is already buying hand over fist.

samcontrol's picture

Hi , i'm new , i'm European , and i'm sick of being right and not making money making me a mule to say the least. ZH being a last resort for me here. i have a family now and i want a future for them. Sorry, i don't get that.I've been short for a month and i'm gettting hammered. DTO, TWM , VXX(what a scam, how do i get so f stupid) .I have held EUO for a year and that's ok. I love Pms but sold my good ones and held the merde one. So i sold slw,gld,pplt and held gdx !@###!!!. I did good for ten years doubling my $ , not 2 bad considering i have a real big adhd problem ,i'm self taught and my bankers are thieves. In the last six month i have become very very scared , more than ever. I took precautions went safe and got burned. everyone on this board seems to see the world as i do , but i need other advice besides buy beans guns and gold. I am fighting the fed... bad idea right? Can anyone help me be patient ? Thanks. I have a good side , a funny side and a really bad temper side. You will meet all of them in the future. Thanks again.

JPM Hater001's picture

I have this one guys...

Stop playing the game.

Gold Guns and beans...yeah...thats about it.

samcontrol's picture

if i stop playing the game i can't buy gold , guns and beans ( and i have some already), i  have no job and don't intend to get one.

I'll thrive or die by the game .

Help or advice would be nice!


resurger's picture

Your a BadAss!

What gun you got?

JPM Hater001's picture

Get a job.

Otherwise you are playing the game.  If you think you are going to make it by shorting the market you need to understand that there are powers out there that are trying very hard to ensure it doesnt happen- Via Extend and Pretend money print game.

The other side says play the options market and buy calls on bluechips but when the game is over the game is over.  You loose everything.

I too have ADD so dont toss me any excuses.  Wake up, get a job, save with Precious metals-I like silver.

In fact if you want to play and NOT play the game buy silver...it is on its way back up and you can cash out as you need fiat.  But believe me- what you want is someone to show you how to game the market and there isnt a successful way to do this safely.

I reiterate...get a job.

samcontrol's picture

thanks jpm , better advice..

I will not get a job , for starters i live in patagonia Argentina right next to an active volcano that closed the airport and no more tourism. I bought a house here and will not move. I have enough money if i don't lose it, doubled playing the game , jobs here pay NADA. Want to spend time with the family.

However , I have started a wine cellar for the future( 5-10 years) and might buy farmland/seaculture land in Chiloe , Chile.

BTW , i think silver gets one last pullback to 25. jmo. Then i'll buy .


JPM Hater001's picture


As for a pullback.  Watch the bears...its all fiat and there is no time like the present.

3 years early is far better than 5 minutes too late.

gmak's picture

You don't have to be in the risk markets every day. Pick your entry point and exit point. If you are stopped out - stop trading.  Be more patient.


JPM Hater001's picture

"ZH being a last resort for me here."

Not last...  You finally arrived at the truth here.  That makes this your first resort.  Try the lemonade.  It's raspberry delicious. 

And not a drop of coolaid anywhere.

Dont forget to Down Arrow Million Dollar Bonus.

resurger's picture

Hey Samcontrol

 Welcome to ZH +1

Whatever you read here is the truth about what's going on in the markets undiluted, but you have to read the charts of your stock very carefully and you have to calculate your Stop/Loss whenever you go short or long on a stock... There are so many people with different opinions in here..

you have to know that the markets are not based on supply/demand any more, and most of the people whenever they are making money from this bullshit market (for me is the DOW) they are going to dump them in Gold and Silver, because those guys they are XXXL Junkies who are addicted to Printing, Prostitutes, Cocaine and fucking everyone else.

Dont ever! LIKE EVER READ BLOOMBERG< CNBC < BBC < CNN or any of that shit and make your buying/selling decesions from there! EVER!

Am a Bear, i dont buy stocks .. but never buy/Sell high volume all in once (go all in at once) you should split them in 3 or 5 trades whenever you making money or losing, and always know your Margin/Cash




samcontrol's picture

thanks resurger  , good advice.

i sold my pms thinking we get a big market pullback that would also bring down commodities. I was wrong , i will try to be patient and follow your  different advices especially on stop losses and the press.

resurger's picture

Never Sell your PM's NEVER!


I only short stocks!

If you see the USD interest rates (short term is above 1.5% or 2% then go sell it) which will happen only before Judgment Day!


Comay Mierda's picture

spx about to crash priced in gold and silver

fonzannoon's picture

Bulls get slaughtered bears get slaughtered and everyone in between gets death by a thousand cuts.

dwdollar's picture


Bulls get slaughtered, bears get slaughtered, pigs make money because they own the politicians.

resurger's picture

Exactly, now we are all Slaves!

But Bears will win, no doubt!

Snakeeyes's picture

If you look at the charts, there is even a seasonal slump in house prices as well.

Wintertime Blues: Case-Shiller 20 City Index Down -3.67 YoY And -0.7% MoM In November, Housing Still In "The Red Zone"


SheepDog-One's picture

It was a pretty shitty retail Christmas, and pretty shitty earnings season, yet priced-in for 100% awesomeness. Somethings going to kick back bigtime here.

CvlDobd's picture

Oh come on SD1, QE3 baby!

/sarc off

resurger's picture

The party will be over sooner than you expect ..

Dr. Engali's picture

You can thow seasonal trends right out the window when the market is as rigged as it is now.

resurger's picture


 This rigged market! There are shitty news everywhere and Bloomberg shillers are still promoting the postive mantra! Expect the DOW to get fucked very soon for those reasons:

1- Light Volume...

2- They are protecting their Crude Oil Companies (Exxon and Chevron) by peddling the Iran war shit...

3- The bulls who are living on a hope of QEasy3, well they didnt print the money yet...

This is no Supply and Demand no more, Those elites are contorlling everything ill make Sure i short the DOW if it's up 50 points today.


q99x2's picture

Maybe junk stocks sell off in December for tax deductions and are bought back again starting in January.