Monday, February 2, 2009

Negative Outlook for Market from January Barometer

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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At the New York Investing meetup we look at the first four trading days of the year as a guide to whether money is shifting into or out of the U.S. stock market. This reading was essentially neutral this year. There are others however that look at the entire month of January to gage money flow for the market. This reading was unabashedly negative. The Dow Jones was down 8.8% and the S&P 500 was down 8.6% on the month. While the stock market was suffering in January, gold was gaining strength and closed at a bullish six-month high the last day of the month. While worries about inflation (which are only going to get worse) are propelling gold upwards, collapsing corporate earnings and an economy that continues to deteriorate are pushing stocks down.

Trading activity in January only reinforced already existing trends for stocks and gold that can clearly be seen in their charts. All major U.S. stock indices, including the Dow, the S&P 500, Nasdaq and Russell 2000, pierced their 200-month simple moving averages four months ago. All of them closed below this line in January. There have only been two significant breaks of the 200-month moving average in the last 100 years - briefly during the mid-70s and for a much longer time during the Great Depression 1930s. In sharp contrast to the mega-bear stock index charts, the gold chart is extremely bullish. It indicates that gold's drop from the 1033 high last March is merely a consolidation (sideways movement) in a longer term uptrend.

The poor performance of stocks in January was consistent with the outlook for the economy and corporate earnings, which only got worse as the month progressed. Only a week ago, analysts were predicting a 28% drop in S&P earnings for the Q4 2008. Now a 35% drop is projected. Seven of the 10 sectors in the S&P 500 are expected to have earnings drops. Financials are the only sector that is likely to out and out lose money though. The next worse hit sectors, consumer discretionary and the materials, are heading toward 70% and 69% drops in earnings respectively. Health care, consumer staples and utilities are the only sectors with any possible earnings growth. U.S. consumer spending figures for December were released this morning and were down a worse than expected 1.0% (a record sixth straight drop). Until the economy revives (and this is not in the foreseeable future), earnings growth outside of companies that provide necessities or precious metals is unlikely.

While the beginning of the year provides the most valuable information for future stock performance, trading at the beginning of the month is also something that should be watched. In a bull market, these days are almost always up, although an occasional glitch does happen. In a bear market, down days are much more likely during this period because money is flowing out of the market instead of into as is does during bull phases. Keep an eye on this during the rest of the year, especially at the beginning of a quarter.

NEXT: Government Action on Both Sides of the Pacific

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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