January a Telling Month for this Year’s Market

Watching yesterday’s trouncing of Ohio State by LSU in the BCS Bowl game (my son still thinks Missouri should have been fighting for the national championship) reminded me a bit of what is currently happening in the stock markets to start the year. Markets are currently feeling the heat to the downside, as the near-term bias is bearish. Technically, both market sentiment and breadth are bearish.

Selling is focused on the growth sectors, with the tech-laden NASDAQ and small-cap Russell 2000 already down 5.78% and 5.62% as of the close of Monday, respectively. It is clear that investors are grappling with the potential impact of an economic slowdown and continued weakness in the housing and credit markets.

On Tuesday morning, KB Home (NYSE/KBH), a major homebuilder, added fuel to the fire after announcing a wider-than- expected loss in the fourth quarter due to the soft housing market. The company’s CEO Jeffrey Mezger said that 2008 “will be another tough year for the homebuilding industry,” something the industry did not want to hear.

At this point, the brutal start to 2008, only a few days old, is something to be concerned about. As I said in my recent outlook for 2008, you want to see how stocks perform in January as an indication to the year. According to the “Stock Trader’s Almanac,” in what is referred to as the “January Barometer,” when a positive January occurs, the index finishes higher on the year about 86% of the time. The year 2007 was largely another up year except for the Russell 2000. The overall accuracy for whatever happens in January has been correct about 75% of the time since 1950.

The reality is that the market risk remains high given the uncertainties out there that could impact stocks and the economy, and hence corporate profits.

You will need to be prudent in your trading and avoid taking any major unnecessary risk. This year will continue to be a year for stock-pickers, so be careful.