Tuesday, January 5, 2010

The Second Trading Day of 2010 - The Message From the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The first day of the year was a good one for almost all asset classes - U.S. stocks, foreign stocks, emerging market stocks, and commodities. Bonds were mostly unchanged and the U.S. dollar went down.  The four major U.S. stock indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 all hit new yearly highs. There was some minor give back in the second day of trading, which after a strong rally is not surprising. The basic picture on the second day remained the same however.

While there are slight variations in performance in U.S. stocks based on market cap, there is nothing out of the ordinary so far. They all have had good rallies, with small caps doing a little better than big caps. This is normal behavior since small caps are more risky.  Out performance by big caps would indicate the market was becoming more risk adverse and possibly getting ready to turn over.  Price changes for the first two days by market cap, using the ETFs SPY, IJH, IJR and IWC were as follows:

Big Cap       SPY     +2.0%
Mid Cap      IJH      +2.0%
Small Cap    IJR      +2.2%
Micro Cap   IWC    +2.4%

While the stock market overall has been quite bullish, not all of its nine sectors were doing equally well. Three sectors are well ahead of the pack - Energy, Financials and Basic Materials. Of these, only Basic Materials has hit new yearly highs, which it did on both the first and second trading day of the year. The interest rate sensitive utilities are the only sector that is down so far from its December 31st close. Health Care has traded essentially flat and Consumer Staples have had only a muted rally. Performance of each sector measured by the ETFs, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, and XLY for the first two trading days was as follows:

Energy                             XLE         +4.1%
Financials                         XLF         +3.8%
Basic Materials                XLB         +3.5%
Industrials                        XLI          +2.1%
Technology                      XLK        +1.4%
Consumer Discretionary   XLY         +1.1%   
Consumer Staples            XLP          +0.7%
Health Care                     XLV          +0.1%
Utilities                            XLU          -0.1%

Investors should look for stocks in the top performing sectors. Trading in the beginning of the year gives an indication of what the big money is buying and selling and what they are likely to support or continue to sell in the following months. So far the market is not indicating any significant preference for small caps versus big caps, so investors can be market cap neutral in the size in their selections. U.S. stocks are not the only place to look either. Foreign stocks and commodities offer some better alternatives. So far, the Russian market and silver have been two outstanding performers in these asset classes.

Disclosure: Long silver.

NEXT: The Third Trading Day of  2010 - The Message of the Markets

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.


Mike Nason said...


I'm a fan and a regular follower of your blog.

I'm having a 401K account governed by Vanguard. Which of Vanguard's fund represents majority of the energy sector?


Daryl said...

Hi Mike,

You will have to check with Vanguard for that. ETFs are better choices than mutual funds.