Will 2008 Be a Down Year?

The bears are out in full force, but some oversold buying emerged on Monday as stock indices surged. As we approach the end of January, the selling continues to be focused on the technology sector, as the NASDAQ is down about 12%, while the small-cap growth sector, represented by the Russell 2000, is down about 10%.

The selling in the small-cap sector is expected, and is based on the expectation that small companies would struggle during a recession or slowdown due to their limited financial resources with which to endure an economic slowdown.

The concern for investors is that a weak January could translate into a down year for stocks, according to the “Stock Trader’s” Almanac in what is referred to as the “January Barometer, ” which is accurate in about 75% of the time since 1950. If this does pan out, it will be the first down year after five straight up years (except for the Russell in 2007 and the DOW in 2005) for the stock markets.

Other technical indicators also suggest that the markets are at a near-term bottom. Volatility option readings can suggest this. A high volatility option reading indicates maximum fear and a possible market bottom. A low volatility option reading indicates reduced apprehension and a possible market top.

On the NASDAQ, the CBOE NASDAQ Volatility Index (VXN) — a barometer of near-term market volatility based on NASDAQ 100 index option prices — is generally viewed as a contrarian indicator.

The five-day VXN to January 28 was 33.18, which is above the 30-day moving average (MA) and 50-day MA, as well as the 200- day MA of 22.49. The increase in the VXN could indicate a near- term bottom.

Likewise, on the S&P 500, the CBOE Volatility Index (VIX) to January 25 was 28.81, which is above the 30-day MA and 50-day MA, as well as the 200-day MA of 19.87. The increase in the VIX could indicate a near-term bottom.

These are only near-term indicators, however, as the overall sentiment remains bearish.