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The January Indicators
Indicator #1 This technical seasonal indicator is giving a bullish signal. Since the early 1970's a big advance on the first trading day in January has been a very good indiactor that equities will register substantial gains for the rest of the year. On Monday January 4th, there was encouragintg news about the the manufacturing sector which helped the Standard & Poor's 500 index to advance 17 points and the Dow Jones Industrial Average to gain 155 points. Studies have shown that any time the S&P500 has advanced over 1% on the first trading day of the year, the index was able to close higher for the year about 85% of the time.
Indicator #2This indicator is also giving a buy signal. According to the "Stock Trader's Almanac," the first five trading days in January often determine the trend for the rest of the year. According to this research, "the last 36 up first five days were followed by full year gains 31 times, for an 86.1% accuracy ratio and a 13.7% average gain in all 36 years."
Indicator #3 "As January goes in the stock market, so goes the rest of the year." This indicator is not necessarily the most reliable of the three January indicators. However, of the three "January indicators" it is the price direction of the entire month of January that is the most widely followed. There is a very stong tendency for an up January to be followed by full year gains for the broad indexes. For the third consecutive year, this indicator is giving a bearish indication. This indicator was bearish this year with both the S&P500 and the Dow Jones Industrial Average closing substantily lower on the month.
I am not placing too much faith in this signal, since history has shown that this indicator tends to be relatively reliable when it flashes buy signals, but has a poor record when it generates a sell signal. For example, the full month "January indictor" last year gave bearish indications, which proved not to work.
This year, while the "first day of January" and "first five days of January" indicators have given bullish readings, the full month January indicator is clearly bearish. The bears on the stock index futures are focusing on the more widely followed January Indicator #3, which is adding to their growing arsenal of bearish aguements. The bullish first day of the month and the first five days of the month January indictors (January Indicator #1 and January Indicator #2) received relatively little media attention. However, the more widely followed January indicator #3, the monthly indicator, is causing the bears to ramp up their growling. When looking at the "January indicators," two of the three are giving bullish signals, which goes along with our optimistic fundamental long term bias on the market.
Recent Fundamentals
The late Janaury drop in prices cannot entirely be attributed to technical pressures. Stock index futures quickly fell after President Obama announced the Paul Volcker-inspired plan to limit the size of banks and their propriety trading. Paul Volcker is Chair of the President's Economic Advisory Board. These newly proposed banking limitations are commonly referred to as the "Volcker Rule." The plan involves the separation of commercial banking from investment banking, which is similar to the Glass-Steagall Act that was passed by Congress in 1933. This legislation prohibited commercial banks from collaborating with full service brokerage firms or participating in investment banking activities. Glass-Steagall was repealed in 1999.
Another recent negative fundamental for stock index futures is the threat to the euro zone, in light of more talk that Greece may not be able to solve its budget problem without outside help. The European Commission said Greece "had not taken effective action to correct the deficit by the 2010 deadline." The budgets of Spain and Portugal are also being closely monitored by the European Union. There was a better feeling more recently after Greek Prime Minister Papandreou announced further measures to limit their budget deficit of 12.7% of GDP to the mandated European Union's limit of 3% by the end of 2012. This plan received the approval of the European Commission.
Some of the selling pressure during the last two weeks of last month can be attributed to tighter lending standards from China's central bank, when they increased their benchmark interest rate, the one year bill, to a 14 month high. This was the second time this year that the Chinese central bank pushed the one year bill interest rate higher. It now appears as though most of the negative factors for the market, bank regulation proposals, euro zone sovereign debt issues and China's tighter credit policies are fully reflected in current pricing.
Our most recent fundamental analysis tells us that this new bull market that began in March 2009 is still a bull market. In the longer term, the strengthening economy will be able to overcome all other influences, including the political ones. Our work also continues to suggest that this year the majority of the economic reports and quarterly corporate earnings reports will be stronger than the median guesses.
Federal Reserve policy is likely to remain accommodative longer than many analysts are expecting. Over the past few months we have seen the probably of tighter credit from the Federal Open Market Committee being moved farther out into the future. Many of the primary government securities dealers believe that there will not be an interest rate increase until after the mid-term elections or even possibly not until well into 2011. In an apparent effort not to be accused of being political, the FOMC in the past has shown a tendency to not make policy changes just before important political events. This is one reason why we believe that the next tightening of credit may not take place until after the mid-term elections or even not until 2011.
Every bull market has its corrections and the recent selloff does not change our thinking. There were corrections in July and November of last year, which were both followed by moves to new highs.
The January Indicators
Indicator #1 This technical seasonal indicator is giving a bullish signal. Since the early 1970's a big advance on the first trading day in January has been a very good indiactor that equities will register substantial gains for the rest of the year. On Monday January 4th, there was encouragintg news about the the manufacturing sector which helped the Standard & Poor's 500 index to advance 17 points and the Dow Jones Industrial Average to gain 155 points. Studies have shown that any time the S&P500 has advanced over 1% on the first trading day of the year, the index was able to close higher for the year about 85% of the time.
Indicator #2This indicator is also giving a buy signal. According to the "Stock Trader's Almanac," the first five trading days in January often determine the trend for the rest of the year. According to this research, "the last 36 up first five days were followed by full year gains 31 times, for an 86.1% accuracy ratio and a 13.7% average gain in all 36 years."
Indicator #3 "As January goes in the stock market, so goes the rest of the year." This indicator is not necessarily the most reliable of the three January indicators. However, of the three "January indicators" it is the price direction of the entire month of January that is the most widely followed. There is a very stong tendency for an up January to be followed by full year gains for the broad indexes. For the third consecutive year, this indicator is giving a bearish indication. This indicator was bearish this year with both the S&P500 and the Dow Jones Industrial Average closing substantily lower on the month.
I am not placing too much faith in this signal, since history has shown that this indicator tends to be relatively reliable when it flashes buy signals, but has a poor record when it generates a sell signal. For example, the full month "January indictor" last year gave bearish indications, which proved not to work.
This year, while the "first day of January" and "first five days of January" indicators have given bullish readings, the full month January indicator is clearly bearish. The bears on the stock index futures are focusing on the more widely followed January Indicator #3, which is adding to their growing arsenal of bearish aguements. The bullish first day of the month and the first five days of the month January indictors (January Indicator #1 and January Indicator #2) received relatively little media attention. However, the more widely followed January indicator #3, the monthly indicator, is causing the bears to ramp up their growling. When looking at the "January indicators," two of the three are giving bullish signals, which goes along with our optimistic fundamental long term bias on the market.
Recent Fundamentals
The late Janaury drop in prices cannot entirely be attributed to technical pressures. Stock index futures quickly fell after President Obama announced the Paul Volcker-inspired plan to limit the size of banks and their propriety trading. Paul Volcker is Chair of the President's Economic Advisory Board. These newly proposed banking limitations are commonly referred to as the "Volcker Rule." The plan involves the separation of commercial banking from investment banking, which is similar to the Glass-Steagall Act that was passed by Congress in 1933. This legislation prohibited commercial banks from collaborating with full service brokerage firms or participating in investment banking activities. Glass-Steagall was repealed in 1999.
Another recent negative fundamental for stock index futures is the threat to the euro zone, in light of more talk that Greece may not be able to solve its budget problem without outside help. The European Commission said Greece "had not taken effective action to correct the deficit by the 2010 deadline." The budgets of Spain and Portugal are also being closely monitored by the European Union. There was a better feeling more recently after Greek Prime Minister Papandreou announced further measures to limit their budget deficit of 12.7% of GDP to the mandated European Union's limit of 3% by the end of 2012. This plan received the approval of the European Commission.
Some of the selling pressure during the last two weeks of last month can be attributed to tighter lending standards from China's central bank, when they increased their benchmark interest rate, the one year bill, to a 14 month high. This was the second time this year that the Chinese central bank pushed the one year bill interest rate higher. It now appears as though most of the negative factors for the market, bank regulation proposals, euro zone sovereign debt issues and China's tighter credit policies are fully reflected in current pricing.
Our most recent fundamental analysis tells us that this new bull market that began in March 2009 is still a bull market. In the longer term, the strengthening economy will be able to overcome all other influences, including the political ones. Our work also continues to suggest that this year the majority of the economic reports and quarterly corporate earnings reports will be stronger than the median guesses.
Federal Reserve policy is likely to remain accommodative longer than many analysts are expecting. Over the past few months we have seen the probably of tighter credit from the Federal Open Market Committee being moved farther out into the future. Many of the primary government securities dealers believe that there will not be an interest rate increase until after the mid-term elections or even possibly not until well into 2011. In an apparent effort not to be accused of being political, the FOMC in the past has shown a tendency to not make policy changes just before important political events. This is one reason why we believe that the next tightening of credit may not take place until after the mid-term elections or even not until 2011.
Every bull market has its corrections and the recent selloff does not change our thinking. There were corrections in July and November of last year, which were both followed by moves to new highs.
S&P500 FUTURES-WEEKLY
Chart provided by APEX
We believe that the recent late January-early February correction is nothing more that another bull market correction. We also believe that, like the previous corrections last year, this one will be followed by an advance to new highs later this year.
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