Technically Speaking: 2021 Investor Resolutions & January Stats

January Investor Resolutions, Technically Speaking: 2021 Investor Resolutions & January Stats

January also holds the title for the most favorable return months, followed only by December and April.

January Investor Resolutions, Technically Speaking: 2021 Investor Resolutions & January Stats

But January is not always a winner. While the statistical odds are high, particularly after a strong start, it does not always end that way. It is worth noting that while January’s maximum positive return 9.2%, the maximum drawdown for the month was the lowest for all months at -6.79%.

January Investor Resolutions, Technically Speaking: 2021 Investor Resolutions & January Stats

An Overly Excited Beginning

While I don’t directly make asset allocation decisions based on monthly returns from a portfolio management perspective, the statistical weight of evidence suggests a couple of things worth considering.

The odds of January being a positive month greatly outweigh those of it being negative.

With the market already extremely extended, overbought, and euphoric, a mid-month reversal would not be surprising. The panic/euphoria index is at an all-time high.

January Investor Resolutions, Technically Speaking: 2021 Investor Resolutions & January Stats

February is potentially a different animal with only 50/50 odds of being positive. So, with investors overly allocated to equities, leveraged, and unhedged, the potential for a negative catalyst to spark a reversion is high.

Speaking of leverage, whenever margin debt has spiked sharply from its 12-month low, such has usually been associated with short- to intermediate-term market peaks.

January Investor Resolutions, Technically Speaking: 2021 Investor Resolutions & January Stats

Importantly, given the length of the uninterrupted bull market run from 2009 to the present, the risks are mounting the current bull market cycle has entered into the “mania” phase. Such fundamental realities suggest a more conservative approach to investment allocations.

The Battle Of Wits

“Wait, so you are saying January tends to be a good month, but it could correct.”

Yes.

The dichotomy reminds me of the scene from “The Princess Bride” where the “Sicilian” is in a “Battle Of Wits” with “The Dread Pirate Roberts.” 

While it may seem confusing for investors, it comes down to time frames.

For short-term traders, the odds are high that January will post a positive trading month, therefore, allocations should remain tilted towards equity related exposure. If you are a nimble trader and can adjust for the swings in the market, the “odds are in your favor.” 

For longer-term investors, particularly those that are nearing retirement, risks are mounting for at least a short-term correction. Such potential outcomes suggest a more cautious approach to equity allocations in portfolios.

View single page >> |

Disclaimer: Click here to read the full disclaimer. 

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.