The January “Defect” (Preview)

By Lawrence G. McMillan

After all the positive seasonality that surrounds the end of a year (Post-Thanksgiving rally, Santa Claus rally, January Effect), it is probably not too surprising to learn that there is a system that relies on a bearish seasonal pattern.  That is, after about 8 to 12 trading days into a new year, the stock market – particularly, the NASDAQ market – tops out and trades lower for a week or so.  This year, with NASDAQ being so strong, one wonders whether the system will work.  But there have been times in the past where the system has worked even when NASDAQ was relatively strong in comparison to SPX.  The system is sometimes known as “The January Defect.”

The original system was: “Short QQQ on the 8th trading day of January and cover on the 18th trading day.“  We have done a fair amount of research on this system, and the 8th trading day is not typically the best day to short.  Shorting the 11th or 12th trading day in recent years has produced the best profits (still covering on the 18th day).  Moreover, we trade a system like this with puts, not by shorting QQQ, SPY, or futures on them...

Read the full feature article (published 1/13/17) by subscribing to The Option Strategist Newsletter.