What January’s Telling Us

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

Markets are currently in a funk and unable to fight the downward bias that has taken hold of stocks despite some decent quarterly results. Last Thursday saw another triple-digit loss for the DOW, the fifth in the last nine sessions. Markets have declined in six of nine sessions on a trend of weak market breadth, as there is little interest in buying at this time. The S&P 500 is testing key support at 1,080, while the DOW is eyeing 10,000. The charts do not look good, especially given the weak Relative Strength. Support will be from the oversold condition.

January will end up in the red, with the DOW and NASDAQ down over two percent. In mid January, markets were up over two percent and things were looking pretty good, but stocks then began to slide and have done so in five of the last eight sessions to January 27. As we have said in previous commentary, what happens in January could help influence how stocks behave going forward. A positive January can point to gains and given the current situation; a negative January may point to a negative year, yet there is no concrete relationship.

The S&P 500 option volatility reading (VIX) has been rising after being flat for weeks. The VIX is holding at 24 after recently trading as high as 28, its highest reading in months, an indication of increased fear in the market. Be careful as market risk has increased and this could result in more volatility.

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At this moment, traders and investors are cautious on wanting to bid stocks up 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 discounted.

The fourth-quarter GDP grew at a sizzling 5.7% annualized rise, the biggest reading since the third quarter of 2003, largely due to stimulus. Watch what happens when the stimulus moderates going forward and the economy will have to rely on organic growth.

President Obama delivered his second annual State of the Union address last Wednesday at a time when there has been much debate on how effective he has been in his first year in the Oval Office. The President took office at a very difficult time, when the U.S. and global economies were slowing and entering a recession. Over seven million jobs have been lost in 2008 and 2009, and homeowners continue to see their home values fall.

The President did what was expected in trying to rally his troops to advance America. He acknowledged the difficulties, but also called for bipartisan efforts to advance key areas such as healthcare reform, while taking aim at Wall Street. Again, he talked about the importance of small businesses and the creation of jobs, but there was really nothing new here. It was more or less a rallying cry by a President operating in a hostile environment. The next year will prove crucial. The significant growth in the debt and deficit will become more of a sore point over the next five to 10 years.

The estimates set the deficit at a whopping $1.35 trillion this year. Add in the mounting debt of $12.32 trillion or $40,000 per citizen and you’ll understand the immensity. The national debt has increased at about $3.89 billion per day since September 2007. President Obama is looking at cutting some costs, but given the still fragile state of the economy, this could backfire. The reality is that the country faces financial hurdles going forward.