By: Steve Smith
As stocks settle into a range after the recent correction, about 5% above the Friday morning’s lows and 5% below the all time high, it’s a good time to assess whether the parabolic move up in January represented the market top. Today’s investing advice will weigh the evidence for and against.
Dana Lyons did some research that suggests that a large percentage of market tops are indeed made during the month of January.
The free fall in stocks over the past week clearly indicates that the late January stock market top was an important inflection point. But in what context and over what duration? Obviously those answers, at this point, require a crystal ball. From one historical angle, however, it would not be unprecedented for the recent high to signify a short or long-term top.
From a seasonality perspective, it has been more common for some months to mark significant stock market tops. Whether that is completely random or not, we don’t know — obviously there have to be winners and losers among the months. Looking historically, though, we do know which months have marked a higher incidence of stock market tops. And at the top of the list for both 3-month tops and 12-month tops is January.
Again, we don’t know if last month’s peak will end up being the high for the next 3 or even 12 months. And as far as investing advice goes, we are not making that call. Certainly the fact the the Dow is 2000 points below the January high means it has serious work to do to regain ground. And this may all be random noise. However, considering various elements here, such as the fact that January has seen 6 12-month tops in its history while July has experienced 0, this dispersion doesn’t seem random.
We have technical and other reasons to expect that stocks have not yet reached their ultimate top for this cycle. However, on a historical, seasonal basis, a top in January would fit as well as any month. That makes the possibility that last week signified the top more plausible.