Stocks Could Be Shaky Heading In To January

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)


Last week, I wrote about some of the year-end tricks, games and trends that we often see in the stock market. One of them, the January Effect, where the most beaten down stocks that make new 52-week lows during the fourth quarter tend to rise from mid December to early January as tax loss selling abates. Look at stocks like COGT, GMXR, PCS and SQNM as examples that worked this so far this year. But similar to 2003 when the market made its low early in the year, the overall trend is somewhat muted to date and there are still dozens of January Effect candidates waiting to make their move.

The last week of the year predictably saw anemic volume as so many traders and portfolio managers took time off and closed their books early. Overall volume hasn’t been strong for several months, but that should change beginning next week when everyone wipes the slate clean and comes back to work at point zero.

Heading into the New Year, we have some interesting crosscurrents that should resolve themselves in early to mid January. On the plus side, the major indices closed the year near their highs for 2009, so momentum is in the bulls’ favor. On the negative side of the ledger, sentiment has become very bullish, which usually precedes a market pullback or flat out correction. Two major sentiment surveys from Investors Intelligence and American Association of Individual Investors are showing more bulls now that we’ve seen in a very long time. So many bulls is a negative since the market often confounds the masses at extremes and by being bullish, it usually means an investor has already committed funds to the stock market. As I’ve mentioned before, this is called a contrary indicator.

Adding fuel to that fire are the options traders who are exhibiting very bullish behavior. These usually wrong folks at extremes have pushed the put/call ratios (ratio of options volume) to warning levels usually seen at short to intermediate-term market peaks. Given that the last rally occurred on such light volume, I would have to give the nod to the bears as we come into January. It will be interesting to see what happens after the third trading day as investors begin to settle in and position themselves.

Finally, it was a very disappointing last five trading days of the year for the bulls. The trend called for strength, but this year was rather quiet with only the Nasdaq 100 showing just a fractional gain. Given that, the next trend calls for the S&P 500 to outperform the Nasdaq 100 during the first five days of the New Year with the Russell 2000 (small caps) and S&P 400 (mid caps) to also show some outperformance next week. These are trades I look forward to executing each year since there’s not much debate as to when to initiate and exit, and the winning percentage has been strong.

Let me take this opportunity to wish you a very Happy, Healthy, Safe and Prosperous New Year! May the world find peace and you have the best year of your life!!

Please feel to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz