Can The Year Be Judge By T e FIirst Few Days Of The Year?

   To the list of old Wall St. maxims that may not always be true, we can probably add the following: “As January goes, so goes the market…”
While a positive return in January has typically been predictive of a positive return for the whole year, the inverse of this hasn’t proven to be any more predictive than the flip of a coin. In any event, with only a handful of the roughly 250 trading days of 2015 in the books, it is way too early to make any judgment about the fate of the equity market based only on a small sample of trading days.

Looking back on the brief volatility events in October and December of last year, the lesson that investors should have learned is that volatility and risk are not the same.  While the stability of returns was called into question in both cases, volatility (as measured by the VIX) only briefly held levels above its long term historical average of 20, and only got as high as 31 on an intra-day basis. It’s hard to argue that there was any real risk being priced into the markets during what amounted to little more than a brief storm.
Setting the proper context is necessary in order to make informed decisions. Equity volatility exhibits a tendency for mean reversion, or return to a historical average. For most of 2013 and 2014, volatility was all but absent from the market. Even taking the 4^th quarter’s hiccups into consideration, the VIX only averaged around 14 for the entire year. After a long period of dormancy, the mistake investors made was to view what was merely a move toward long-term average levels of volatility as a signal that something worse might be on the horizon.
The same can be said for the recent unpleasantness in the market, which as of today seems to have abated. Over the past few trading sessions, just as it was in the 4^th quarter of last year, ultimately only those who succumbed to the noise of the moment and sold experienced any permanent loss of capital.
Risk and volatility are different things, but managing risk means paying attention to volatility. Even the most ardent bulls are susceptible to being spooked when significant drops occur. The only way to combat such skittishness is to control how we think about and respond to volatility events.  While traders may not have this luxury, investors with a long-term orientation should view brief periods of higher volatility as an opportunity, not a risk.  Adopting this mindset requires discipline, patience, and the willingness to accept occasional unrealized losses.Balancing risk and return is never easy, and there are no shortcuts to the process.
As the Doors sang, “The future’s uncertain, and the end is always near.” No one knows what the future holds, and January may or may not turn out to echo the patterns traced in the 4^th quarter. Uncertainty is a constant. The best way to deal with it is not jump to conclusions based on the belief that predictive patterns can be gleaned from limited data.