Get forecasts for the FTSE, DAX, CAC, SMI, AEX, IBEX 35, S&P/MIB and Euro Stoxx 50 every Mn., Wd. And Fri. in the European Short Term Update! Plus, learn about Special Global Opportunities -- like the ones we see now in Toronto TSX 300, JSE Africa All Share and Brazil Bovespa indexes. See the Feb. 06 issue of the ESTU for details; online now, yours risk-free for 30 days.
By Vadim Pokhlebkin
The stock market is a mysterious beast. Like some half-man, half-giant-walking-stick-made-of-charts-and-graphs from the Greek mythology, the stock market, seemingly tamed by armies of well-educated economists, is still not quite understood. What makes it tick? Why does it go up? Why does it go down? Theories abide, but most of them come short of fully explaining its enigmatic nature.
One of the theories is the "January effect," which states that come December, investors sell their stock holdings for tax purposes, only to reinvest their money in January and give stocks an early-year boost. The theory is widely applied by market-timers world over who allocate funds at the end of the year for their January purchases. The "January effect" is also said to be especially kind to small cap stocks that, under the theory, usually jump higher in January than the blue chips.
But, in a fashion typical of mysterious creatures, the stock market likes to surprise. For example, the Dow ones Industrial Average ended lower in January 2005, and – as if to rub it in some more – the Russell "small cap" 2000 was down, too.
And this year -- well, where do we begin. Stocks around the world, both small and large caps, ended January down, and down hard. Maybe the "January effect" theory misfired this year. Or, maybe it wasn’t that reliable to begin with, which would explain why it works one year and not the next. Sadly, another stock market "axiom" says that January is a barometer for the whole year. Apparently, almost every year since 1950, if the S&P went up or down in January, so would the rest of the stock market that year.
And, since "everybody knows" that global stocks take cues from the U.S. indexes, if U.S. stocks fall this year, so should European and Asian stocks, right? Of course, if you again think back to 2005, you will remember that while the DJIA ended that year 0.6% down, European bourses added between 17% and 62%. Hmm.
If you want a method that works, you could try the Elliott Wave Principle. It's not foolproof -- no market-forecasting method is -- but because it focuses on what really moves prices -- namely, investors' collective emotions -- it eliminates most of the distractions the financial media bombards you with.
For example, our latest European Short Term Update (Feb. 6) builds a strong case that European indexes could be close to a bottom right now. This could be an important time to be on board for the ride. Get the details in our European package now – risk-free, as always. Just look below to get started.