On January 3, we at Zolio discussed the optimism of the new year and the likelihood of a bull market throughout January. Now that the month has concluded, let’s see what happened.
As you can see from the chart above, January has been a month of steady gains, with the three major U.S. indices up by over 5% and two over 6%. Compare the curve above to January’s performance in 2012:
The curve is definitely steeper and stronger, especially for the first three weeks of 2012, but the average trendline was better this year than last–5.46% in 2012 vs. 6.1% in 2013. Likewise, the upward slope is more sustained this year and stronger at the end of January, suggesting that momentum alone might be enough for the trend to continue into February.
How the Pros are Playing the Improving Macro Environment
Professional traders aren’t likely to simply ride the rising tide–they will almost certainly look for strategic investments that will maximize their yield as the U.S. economy improves–or at least, as the market expects the U.S. economy to improve. Such moves have already happened, as investors focused on sectors like financials (VFH is up over 7% in January) or utilities (XLU is up over 5% for the same month).
Few professional investors will just invest in SPY and call it a day. Some sectors lagged in January; tech appreciated, but by a thin margin (XLK is up a little over 3%). What we’re witnessing is a stronger American economic environment and greater confidence in the future, but also a wise reallocation of capital to those sectors and those companies with true growth potential. Past performers aren’t guaranteed stars of the future, which is why Apple (AAPL) is down and Facebook (FB) is up (by over 11%).
It will be more difficult to lose money in this environment than in the past, but it’s certainly possible. For professional investors, the bigger concern is taking advantage of this rising tide while it lasts–worries of a slump later in the year, as we saw in 2011 and, to a lesser extent, in 2012, will make investors fret about reaching their growth targets as fast as possible, and then putting tight stop losses in place to protect from a fall.
Likewise, aggressive swing traders will rise with the tide and wait for the (supposedly) inevitable fall to jump out and back in. Timing such a move is hard (according to some, it’s impossible), so the risk in trading such a market is tremendous–especially if this rise continues, albeit at a slower pace, throughout 2013. And that is by all means a possible scenario; rising payrolls are encouraging investors to expect a strong American economy, and if employment steadily improves throughout the year, there’s no reason to expect the Dow to fall any further. With systemic risks due to debt ceiling politicking delayed (and possibly eradicated altogether), investors are pouring money into the market.
Bearish contrarians, on the other hand, are pointing to certain indicators that this exuberance is premature, and the start of another bubble. However, contrarians were wrong in early 2012 when popular media was cheering on the market.
No one can predict the market, but the important takeaway for any investor is that fluctuations and variations are a fact of the financial world. There are inefficiencies that can be exploited for short-term capital gains, at least for those investors with the technical, fundamental, and historical perspectives to translate well-timed trades into profits. Hence January was a great opportunity to make a buck betting aggressively on equities. February might be too–but it also might be a great time to be a contrarian. We’ll see.