Will We See Gains in January?

“Calling the Trend” Column, by George Leong, B.Comm.

As we enter the last two weeks of January, it looks like we could see positive gains in the month. This is important as historically what happens in January helps to influence and foreshadow how stocks behave going forward. A positive January can point to gains and it’s the opposite when the month is down. But, unlike how 2009 ended, technology is lagging both the DOW and S&P 500. On the plus side, small-cap stocks are faring well, up nearly two percent so far in two weeks.

Investors continue to be bullish, as reflected by the high/low ratio, which we will discuss later. Yet, for markets to break higher, there must be a fresh catalyst to drive buying. At this moment, traders and investors are somewhat cautious on wanting to bid stocks up too fast given the uncertainty regarding the strength of the economic renewal in both the U.S. and globally. The gains in 2009 were excellent and have been largely reflected in the market.

The reality is that the country has grown its debt and deficit levels and this is a growing risk, but it’s required to jumpstart the economy out of the recession. Fiscal spending will slow, as many incentive programs have slowed or are coming to an end, so the economy must produce. I sense more incentives may be required to avoid a relapse. The Federal Reserve will likely hold interest rates at record lows for at least the first half of 2010 and then take a close look at the economy. Inflation remains a non-issue, which plays well for rates. The CPI for December was slightly lower than expected, which will allow interest rates to be maintained at the low levels.

Jobs and housing and their impact on consumer spending and confidence will be the key variables to monitor this year. The key jobs report for December was disappointing and pointed to the loss of another 85,000 jobs, worse than the 35,000 estimate and the 11,000 job losses in November. The unemployment rate held at 10%. Given the lagging jobs, there will be pressure for the Obama administration to reverse the losses and generate jobs in 2010. Only through job gains will consumers become more confident when deciding to make that next nonessential purchase. The reality is that corporate America is likely hesitant when thinking about adding jobs until the economy begins to show more life, and this is not good.

Housing prices must also stabilize and begin to ratchet higher in order for homeowners to want to spend more either on renovations or borrow against their home equity to buy discretionary goods and services. The housing situation is better than it was a year ago, but there remains weakness across the board with massive foreclosures, which have largely driven the resale housing market. For things to improve, we need to see buying activity for new and resale homes to rise. Prices of homes have continued to fall across the country, and this will need to halt.

The fourth-quarter earnings are upon us. This will provide some market volatility and give us added insight into how corporate America is faring.

In financials, JPMorgan Chase & Co. (NYSE/JPM) disappointed. Citigroup, Inc. (NYSE/C) reported a $0.33 per share loss, in line with estimates and much improved from the loss of $3.40 a share in the comparative fourth quarter. Citigroup is flat in pre-market. The other major banks are set to report later in the week. TD Ameritrade Holding Corp. (NASDAQ/AMTD) fell short on both revenues and earnings.

The key is to look at revenue and see if there is growth, specifically organic growth versus that from acquisitions. Earnings could be manipulated via cost-cutting, so we like to look at revenues. If revenues fail to rise, it indicates slow demand.