How The 'January Effect' Could Spark Tech Stock Renaissance In October, Q4

Technology stocks are likely to have a high probability of rallying in the just-started month of October and then extending their positive performance into the fourth quarter of the year.

This optimistic outlook is substantiated by a study conducted by Datatrek Research, which analyzed the historical returns of the S&P 500 and Nasdaq Composite indices.

The analysis hinges on the “Strong January Return Indicator,” a metric designed to forecast the performance of major U.S. stock indices in years when January exhibits substantially positive gains.

What Is The January Effect On The Stock Market?

On Wall Street, an age-old adage states, “So goes January, so goes the year,” and the year 2023 perfectly aligns with this adage.

In January 2023, the S&P 500 index, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), surged by an impressive 6.2%, while the Nasdaq Composite, represented by the Fidelity Nasdaq Composite Index ETF (NYSE:ONEQ), experienced an even more remarkable gain of 10.6%.

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Excluding 2023, there have been only eight instances where the S&P 500 and Nasdaq saw returns that surpassed their January averages by more than one standard deviation, with the S&P 500 gaining over 5% and the Nasdaq over 8.5%.

In these years, Datatrek has identified a recurring seasonal pattern. The two primary indices tend to show above-average returns for the whole. Both post average positive returns in each quarter of the year, except for the Nasdaq in the Q3.

What to Anticipate for October 2023 and Q4?

As we enter October in a Strong January year, the S&P 500 has roughly equal odds of advancing this month, while the Nasdaq boasts a significantly higher likelihood (83%) of doing so.

Historically, the S&P has, on average, dipped by 2.8% in October during ‘Strong January’ years, whereas the Nasdaq has shown a gain of 0.8%.

Excluding the outlier of October 1987, characterized by the Stock Market Crash of 1987, the S&P’s decline has been minimal at just 0.1%, while the Nasdaq has recorded an average increase of 6.4% during “Strong January” years.

Both the S&P 500 and Nasdaq typically exhibit strong performance in the fourth quarter of “Strong January” years. The S&P experienced gains in the fourth quarter during 6 out of 8 years, with an average increase of 1.2%.

Excluding two outliers such as 1987 and 2018, the S&P achieved an average gain of 7.7%. The Nasdaq displayed even more promising results, with gains in the fourth quarter during 5 out of 6 years, averaging an impressive 15.3%. When excluding the outlier of the fourth quarter of 1987, the Nasdaq’s average gain reached an impressive 23.5%.

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