Top Gun FP Client Note: The January Barometer

February 4, 2010 at 10:02 am  ·  Category: Market Commentary, Technical Analysis, Top Gun Financial Planning

NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a 24-48 hour delay from time to time.  Here is this week’s.

*****

A weak January bodes ill for stocks the rest of the year.  According to Ned Davis Research, in years when the Dow has risen in January, the median rise for the rest of the year is 10.4%.  In years when the Dow has fallen, the median rise for the next 11 months is just 0.28%.
 
“Stocks Hit Worst Run Since Financial Crisis”, Tom Lauricella, The Wall Street Journal, January 29, A1
I would generally avoid discussing the January Barometer given how little value such indicators usually have and how overanalyzed this particular one has been in recent days.  In this case, however, I think there’s something to it.
 
The reason has to do with the unique character of last year’s rally.  In the latter months of 2009, as the rally approached dizzying heights amidst drunken speculation, many money managers found themselves with significant profits.  Because many money managers, especially hedge funds, are compensated based on performance, they had a huge incentive to keep the market high through year end.  Then they could take their 20% of profits.
 
2010, however, is a blank slate.  The performance race starts all over again.  Hedge funds don’t have big profits they desperately want to hold onto.  They can position themselves more objectively based on their view of market prospects.  Therefore, the character of trading this January carries added import, in my opinion.
 
What we’ve seen through the first 20 trading days of 2010, especially since Thursday January 21st, is a dramatic reversal in the “risk trade” (see “Top Gun FP Client Note: The Risk Trade”, Top Gun FP, December 13, 2009).  The S&P 500 lost 6.64% in the eight trading days ended last Friday (January 29).  But higher beta stocks that compose the “risk trade” sold off even more over the same period.  Here are some examples:
 
Stock                                  % Change (Wed 1/20-Fri 1/29)
Emerging Markets ETF (EEM)           -10.56%
Brazil ETF (EWZ)                              -13.31%
Goldman Sachs (GS)                          -10.87%
Alcoa (AA)                                        -18.50%
Caterpillar (CAT)                               -14.89%
US Steel (X)                                      -32.11%
Also important is that volume has been big on the selloffs and light on the rallies.  The four highest volume days of the year also happen to be four of the worst days of the year.  The rallies, such as yesterday and todays, are coming on notably lower volumes.
 
Day Date NYSE Composite
Volume
% Difference
From Year Average
S&P Close % Change
Mon 2/1/10 4,228,826,101 -15.7% 1,089.19 1.43%
Fri 1/29/10 5,749,179,096 14.5% 1,073.87 -0.98%
Thu 1/28/10 5,608,331,228 11.7% 1,084.53 -1.18%
Wed 1/27/10 5,429,665,954 8.2% 1,097.50 0.49%
Tue 1/26/10 4,826,652,979 -3.8% 1,092.17 -0.42%
Mon 1/25/10 4,602,212,401 -8.3% 1,096.78 0.46%
Fri 1/22/10 6,384,803,838 27.2% 1,091.76 -2.21%
Thu 1/21/10 7,021,785,569 39.9% 1,116.48 -1.89%
Wed 1/20/10 4,922,843,735 -1.9% 1,138.04 -1.06%
Tue 1/19/10 4,752,795,679 -5.3% 1,150.23 1.25%
Fri 1/15/10 4,930,550,553 -1.8% 1,136.03 -1.08%
Thu 1/14/10 4,040,467,652 -19.5% 1,148.46 0.24%
Wed 1/13/10 4,286,373,829 -14.6% 1,145.68 0.83%
Tue 1/12/10 4,842,070,264 -3.5% 1,136.22 -0.94%
Mon 1/11/10 4,354,271,071 -13.2% 1,146.98 0.17%
Fri 1/8/10 4,506,612,916 -10.2% 1,144.98 0.29%
Thu 1/7/10 5,419,781,753 8.0% 1,141.69 0.40%
Wed 1/6/10 5,090,936,980 1.4% 1,137.14 0.05%
Tue 1/5/10 5,266,194,179 4.9% 1,136.52 0.31%
Mon 1/4/10 4,122,104,159 -17.9% 1,132.99 N/A
           
  AVERAGE 5,019,322,997      

Finally, the news has actually been strong.  Earnings have been better than expected and recent GDP and ISM Manufacturing reports are the strongest since the beginning of 2003-2007 bull market.  But the market won’t go higher.  To me, this smells like a definite change of tone from the euphoria of last year.  I don’t expect that kind of environment to return.

January ’10 Performance
S&P: -3.70%
DJ Total: -3.46%
Top Gun: +0.27%
 
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113
 
CALL NOW FOR A FREE INITIAL CONSULTATION!
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