Options Trading Insights: Markets Drift Higher In January, Sent Bears Into Hiding 1-16-24

Market drifted higher into January across the world Sending Bears back into hiding

January tends to be a very tricky  time in the market, Where leaders become losers and losers briefly become leaders.  Oftentimes to the untrained eye, there is no rhyme or reason for this, but for those who have been following markets long enough we chalk it up to a theory known as the “January effect”.

This phenomenon happens for two main reasons.  The first one has to do with taxes where shares are bought back cheaper in January after being sold at higher levels in December,  a process referred to as “tax harvesting”. What also occurs simultaneously is some losing names from last year begin to move higher as portfolio rebalancing takes place.  You will see volatility in popular names from last year that are being sold off in early January only to be repurchased again at lower levels. Once the smoke clears not much really changes other than that new investors are often left extremely confused.  So far this year was no different.

The second occurrence that often happens in January is institutional rebalancing.  This often occurs at the end of January when certain sectors or areas of the market that were overlooked last year start getting scooped up by institutions.   All you have to do is look at the recent surge in the unpopular healthcare sector (see below) and you’ll see what I’m talking about.

The best way to handle a typical January trading month is to not “handle” it at all. Avoid the best as well as don’t get sucked into the worst until an uptrend is established.  See the energy sector below for a false move higher:

This trend break left many “hoping” for a big move that never came.

I went out of my way  to purposely avoid both top performers as well as bottom performers.  Instead I look towards the obscure,  overlooked,  and underserved names to build out my January watch list.  For example, names like  BCE (see below),  have really good upside potential as they form early stage uptrends.

On the downside, I selected lesser-known energy names that seemed to lack any upside participation like LNG below:

It is often difficult to conduct the normal top-down analysis that I do every week at the beginning of the year for these reasons.  It’s important to often let the January dust settle first.  So I generally let the “horses out of the gate” for a couple of weeks to see who doesn’t stumble and start to gain a decent stride.   

Besides healthcare,  communications,  technology,  and financials seem strong out of the gate,  while basic materials and energy seem to have stumbled a little early for 2024.   (see below)   It is, however, way too early to tell.

Basic Materials disappointing after a nice 2023 finish:

I will position myself bullish going into this week, but selecting names a bit off the beaten path, looking to also dodge any “earnings bombs” along the way.  As we saw last week ,many bank stocks were “priced to perfection”, and suffered some pretty disappointing price action come earnings day. (see WFC below):

January is indeed a month of jockeying, rebalancing, and tax shenanigans.  To profit from it is best to avoid it, be aware of the confusion, and follow your process to best work around it. I will continue selecting lesser-known names  that still fit my screening process until some new leaders potentially emerge and take us to a successful 2024.