Forecasting 2022 from January–February Anomalies

Hello, this is Geshoyama.

More than half a month has passed since the start of 2022, but

the stock market has been weak since the beginning of the year.



The Dow Jones Industrial Average

started at 35,911.81 dollars at the beginning of the year,

and by January 14 was at 35,911.81 dollars

a drop of more than 973 dollars.

In terms of the drop percentage, it is -1.84%.



Also, for the remaining two of the three major indices,

the Nasdaq and the S&P 500

both have fallen since the start of the year.



The Nikkei Stock Average also

started at 29,301.79 yen at the beginning of the year,

and by January 14 was at 28,124.28 yen,

a drop of more than about 1,177 yen.

In terms of the drop percentage, it is 4%.



Behind this overall decline,

it seems that there is a large outflow of funds from risk assets

due to expectations of interest rate hikes by the U.S. Fed.



Also, the spread of the Omicron variant

will likely be negative for stock prices unless

there is additional government support.

However, given the current circumstances, further easing is

not currently being considered.



Since 2021 the Dow has had the highest-ever gain,

so the declines are likely to be sizable as well,

and this year will require attention to that point.



For readers who trade stocks, you may know this,

there is a term in the stock world called the “January effect.”

This is what is often called an anomaly,

and it is something you should know when investing in stocks.



Therefore, today I would like to explain

the “anomalies” in the stock market.





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What is an Anomaly?

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Anomaly is defined as

“market-lundinary fluctuations and phenomena that cannot be explained by theory”

and so on.



Although it is difficult to explain theoretically,

there is a rule of thumb that

during certain periods, similar tendencies occur.

It is like empirical law or heuristic.



Anomalies exist for each market, such as

stock markets and foreign exchange markets.



Representative anomalies include

“January effect,”

“small-cap effect,”

“low P/E effect,”

“dividend yield effect,”

and so on.


In Japanese, anomalies are sometimes called

“market maxims.”


Not all anomalies are based on experience alone;

some have theoretical backing, such as

“April high, carp streamers sky-high”

which suggests that when the fiscal year changes

new funds tend to flow in, and the market tends to rise until around early May,

and there are other theoretically grounded anomalies as well.







However, the saying “the market roils on the second new year”

is a market maxim that implies that months starting on the second day

often see market volatility, yet there is no rational explanation.







Nevertheless, there are many anomalies that tend to occur

despite not understanding why,

and sometimes these anomalies occur repeatedly.





In short, this tells us that the stock market does not move solely on economic rationality.







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January Anomaly

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The January anomaly is called the “January effect.”

This is the idea that movement in January determines the direction for the year,



and if January’s monthly bar is bullish, the year tends to be bullish,

and if it is bearish, the year tends to be bearish.













Also, in the stock market you can predict the year by

the first five days of January.





A year in which the first five days in January rise tends to be a good year,

and a year in which they fall tends to be a bad year.

The saying that the overall market for the year resembles January’s movement

has historically hardly ever been wrong.





If January declines, it can be a prelude to social problems arising.







As noted above,

considering both the U.S. major indices and the Nikkei indextogether

indicates that 2022 is likely to be a down year for the stock market.







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February Anomaly

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Next, February anomalies,

the stock market has a saying: “Setsubun tops, Higan bottoms.”

This means prices peak in early February and bottom in early March.



Regarding February anomalies,







this year is questionable, but

anyway February tends to be a down month.





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Summary

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Today I explained anomalies, but

anomalies exist for each month.



For beginners in investing, there is a tendency to

take anomalies at face value too much.





This can lead to failures if you trade strictly by anomalies.







Anomalies are there to provide guidance, but they do not guarantee

the same outcome every year.







Especially after the pandemic, there have been many unprecedented events

where experience alone cannot guarantee success in the environment.







So, always remember that the market reflects fundamentals and human psychology,

and keep up with current affairs to make sound judgments.









This newsletter will continue to cover current affairs and

how they may affect the stock market,

while also reminding you not to rely solely on analysis or predictions,

and to pursue risk management that tolerates forecast errors.











Thank you for reading until the end today.

Sincerely, Keizo Geshan








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End of note.