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
http://investing.meetup.com/21

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.

The Santa Claus Rally and the January Effect

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 Santa Claus rally is a move up in stocks that takes place around December 25th. This rally was already part of Wall Street lore in the 1800s, and was memorialized in the ditty: 'If Santa fails to make a call, the bear will come to Broad and Wall'. There is no general agreement on the exact dates of the rally. It is defined as beginning from a few to several days before Christmas or immediately thereafter. It ends either in the current year or two or three days into the next year. It is most useful to think about it as two separate phenomenon. The first as the trading period around Christmas day and the second as the first four trading days of the new year. Each has its own message.

The bullishness in stocks around December 25th probably doesn't have much to do with the holiday per se, but with year end adjustments within the financial system. Instead of calling it the Santa Claus Rally, it would probably be more accurate to refer to it as the Year End Rally. If you look at long-term charts, you will note that the VIX, the volatility index, is either low or drops around the end of the most years. This is bullish for stocks. The VIX hit a yearly low on December 22nd in 2009 trading below 20 for the first time since the summer of 2008. An exceptionally low VIX while bullish in the short term sets the stock market up for eventual selling however.

What happens at the end of the year and at the beginning of the year can be quite different however and the two shouldn't be lumped together. Investment money tends to be reallocated at the beginning of a quarter and this is most pronounced in the first quarter. Investors should watch closely what sectors rally and what sectors of the market experience selling during the first four trading days of the year. This tells you where money is flowing. If the stock market overall sells off in the first four days, this is a bearish signal at least for the first quarter. It indicates big money is withdrawing its support from stocks.

The first four days trading signal is sometimes lumped in with the January Effect, but shouldn't be. The January Effect is a tendency for stocks to rally during the first month of the year, with small caps outperforming big and mid-caps. The January Effect was noted in the U.S. by the 1920s and perhaps even earlier. It has been observed in a number of stock markets throughout the world. The effect seems to have become dampened in recent years.

Trading volume tends to be low around the end of the year because many people are away because of the holidays. This can exaggerate price movements. Liquidity coming from the Fed and other central banks will have a more pronounced impact than usual. If you look at a chart for the U.S. Monetary Base, you will see that it has been rising vertically in the last few months. It is not surprising that the current liquidity fueled rally in stocks is continuing.

NEXT: NovaGold Leads Mining Group on Takeover

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.