Too Late for the January Effect?

01/07/2011 9:45 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

chart
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Chart Analysis: Over the holidays and early in 2011, many have written about the so-called "January Effect," whereby small cap stocks outperform their large cap brethren. Typically, this lasts for the entire month of January, but this year, there are some early signs that the largest part of this outperformance may already be over. As a regular feature of “Charts in Play,” I monitor the relative performance (RS analysis) of the S&P 400 Mid-Cap Index as well as the S&P 600 Small Cap Index to the large cap S&P 500. This is analyzed from both a daily and weekly standpoint.

In late September, the downtrend in the RS was broken, suggesting that the small caps were going to start outperforming the large cap S&P 500. This chart notes five different periods since early 2009 when the S&P 600 was acting either weaker or stronger than the S&P 500. During periods of market strength, small cap stocks will generally take over leadership, and conversely, large caps will decline less when the market is correcting. The RS is still in a solid uptrend, but it does show some short-term weakness (see insert) as it has recently dropped below its moving average (MA). If the RS starts to develop a pattern of lower highs and lower lows, it will increase the chances that the uptrend may be broken.

What It Means: Though it is still too early to conclude that the small cap S&P 600 is entering a period where they are going to be weaker than the large cap S&P 500, the recent action should not be ignored. Should the RS analysis turn negative on the S&P 600, it would likely coincide with a market correction.

How to Profit: This analysis suggests that it may be too late to jump on the January effect bandwagon, at least on an ETF or index basis, though individual small cap issues may still outperform large cap stocks in the same sector.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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