A Gold Trade to Play the “January Effect”

It’s widely believed that January is bullish, especially for small-cap stocks. The prevailing theory behind this is that year-end bonuses are spent on stocks in January. And as individual investors are the overwhelming holders of small caps, this is where these year-end bonuses tend to flow.

However, that is just a belief. One that’s easy to test.

And the results will surprise those who believe in the January Effect.

Because as it turns out, a very different sector tends to have better Januarys than any other.

Over the past 20 years, the iShares Russell 2000 ETF (IWM) has been up eight times in January. That’s a 40% win rate — hardly enough evidence to call it an “effect” in my view.

There were some big wins, including a 10.7% gain in 2021 and an 11.5% gain in 2019. But most years, IWM loses money in January.

Results for the SPDR S&P 500 ETF (SPY), which holds mostly large caps, are better. But they aren’t much better than the flip of a coin.

SPY was up 11 times in the past 20 years, a 55% win rate. That’s the same win rate as the Invesco QQQ Trust (QQQ), an ETF that tracks the tech-heavy Nasdaq 100 Index.

In testing an extensive list of ETFs, only one stands out as a bullish seasonal trade for January. This is the really surprising part.

That ETF is SPDR Gold Shares (GLD).

The Right Way to Trade Gold

Now, you may know I’m not a fan of GLD because of the way it’s taxed. But it has gone up in January 77% of the time since it began trading in 2004.

Gold itself has been traded on futures exchanges since 1974. In those 47 years, gold futures have been up 61.7% of the time in January, and taking every trade resulted in an average gain of 1.3% in the month. On average, winners gained 3% while losers lost 4%.

While that may not sound like much, it’s important to remember that futures are leveraged. That means you only need to allocate a small amount of capital to the trade. Let’s look at an example of how these trades might play out over this year.

First, some essential background. In futures, the capital required to open a trade is called margin.

For gold futures, the required margin is about $10,000. Each contract covers 100 ounces of gold. At a recent price of about $1,800 per ounce, that $10,000 in margin offers exposure to $180,000 of gold.

A 1.3% gain on $180,000 is a significant amount of money, about $2,300 for a single gold contract. Based on the margin requirement, that’s an average return of about 23% in one month from gold’s seasonal tendency.

That demonstrates the power of using leverage in trading. But futures trading, with their potential to lose far more than your initial position, isn’t the right choice for most individuals.

However, options can also provide leverage and are suitable for many individual investors. Options on GLD also avoid those tax concerns I have with the ETF.

Your Trading Plan for January

This is a simple options idea to trade. Since we want to hold a position equivalent to buying gold, we can buy a call option on GLD.

Since we simply want exposure through January for this trade, the option expiring on January 28 is the best fit. There are other options available, but buying one that expires after January simply raises the trading costs of this trade.

GLD is at about $168 as I write this. The January 28 $168 call is priced at about $3.00.

If we have an average winning trade of 3%, GLD would move up to about $173 and this option would be worth $5, a 67% gain. If GLD suffers a loss of 4%, the average amount of a losing trade, this option will be worth nothing and your loss would be $3.

This is the only high-probability trade I could find for the January Effect, based on the data. It’s definitely not the one most traders would expect to make, but history tells us that trading gold in January is actually a far better way to play the “January Effect” than small caps.

Regards,

Michael Carr, CMT, CFTe
Editor, One Trade

P.S. Traders instinctively understand that markets “rotate.” One sector does well for a while, and then the money flows into another.

Most traders can only guess which one that might be — but Chad Shoop can do much better than guess.

Using his proprietary Profit Radar, Chad sends his subscribers the top index and stock to trade every single week. In just the past couple weeks, Chad made 137% and 127% in days, just by trading the indexes during this volatility.

If you want in on the next one, click here to watch this video while it’s still available. It’s coming down after tomorrow.

Chart of the Day:
Coiled Like a Spring

(Click here to view larger image.)

If Mike Carr’s gonna make such a bullish call on gold for January, we’re definitely taking a look at the chart.

And what I see is pent-up energy.

Gold has spent a lot of time chopping around the $1,800 level. It’s essentially been ranging between a low of $1,675 and a high of $1,930 through all of 2021. Those highs and lows have tightened drastically, as shown by the white resistance/support lines compressing, and the longer-term blue downtrend line crossing between them.

With all that chop, the long-term moving averages of gold have started to coil together. This suggests a lot of energy buildup in the gold price.

The next move in gold could really go either way. There’s no sign from the momentum indicators which way it could go — it’s just that coiled.

But what we can anticipate is a strong move. If it’s to the upside, I think gold will handily break the blue downtrend and probably test the white resistance line once again.

If it’s to the downside, we’ll likely see gold fall back down to touch $1,674 again, and will have to reassess the pattern.

Regards,

Mike Merson
Managing Editor, True Options Masters