Second Verse Same as the First

The end of January is upon us. This is usually the time that “investors” come out of their New Years haze of pushing whatever capital they have into the marketplace. You see, every year, just around the holiday season, money managers become entranced in the hypnotic dance of “Portfolio Adjustment” and “Window Dressing”. It is the theory of selling your losers and adding to your winners and that makes most look just a little bit better around bonus time.

But when January rolls around, just the opposite occurs; the crap that was beaten down, jettisoned and otherwise regurgitated become the object of love and affection. That is the heart of the January Effect. It used to apply just to small cap stocks. Then it became famous for the Dogs of the Dow. This year it is meaningful to the worst performers from last year from any sector. And the results are very pronounced.

But aside from the “Amok Time” for money managers, I’m amazed to see my lone prediction of 2011 come to full fruition. You see, my prediction was that 2011 would look very much like 2010 in terms of the Calendar. And exactly like in 2010, 2011 had a 20%+ gain starting in the beginning of October and the quarter and extending into the first quarter of the New Year.

Like clockwork, over the past several years since the 2008 crash, this time of the year brings about a raucous markup of highly liquid financial-related assets. And like clockwork, during this same time-frame, the estimated prices of homes drops between 6-12%. Last year, in 2011, we were square in the middle of a fabulous QE stimulus where seven billion dollars a day was funnelled into the closed loop of the financial system in order to aid prices. This year, in 2012, we have Operation Twist which was not nearly as strong as last years stimulus. But the rally was birthed around the world simultaneously and on the day of the technical breakdown, October 4, and it has not stopped as of this date. Yet, most everyone looks at the markets with a glazed eye of doubt.

This goes back to our “training” as “investors”. The playbook is the same. Bad news means more stimulus and free money. Good news may mean that all the free money is working. But deep in their hearts, everyone knows whats really going on. But we all play along just the same and will continue to do so until either a “new beginning” or “the end”.

Technically we are overbought by every measure. But that is not enough to turn the advance into a reversal. We are simply in the “Pause the Refreshes” and not pulling back much. SPX 1300 for 2012 is as SPX 1200 was for 2011. And everyone is waiting for more stimulus in this, an election year.

The first pullback will test the breakout near SPX 1260. Then we shall see whether this pretty uptrend is just another trap in an extended trading range, or something else.