A weak financial sector, plus a threat of inflation coupled with low or no growth (stagflation), hit the markets yesterday, and investors didn’t like it. The banks were the hardest hit as they struggled with credit card write-downs and shareholder dilution.
Bank of America (BAC), the Dow 30’s weakest component, fell 2.8% after a write-off of 13% of its credit card debt in November. And JPMorgan Chase (JPM) followed, writing off 8.8% of November loans up from 8.02% in October, according to the Wall Street Journal. Citigroup (C) fell 3.8% to close at $3.56 a share, and the company is expected to place a $17 billion public offering today.
The U.S. dollar rose again, driving the Dollar Index to a two-month high, and that put additional pressure on stocks.
With the November producer price index (PPI) up 1.8%, versus a prediction of 0.8%, and the Empire State Manufacturing Index for December at 2.55, far below the 24 that had been forecast, the problem of inflation with no growth was on everyone’s mind.
Thus, today’s focus will be on the Federal Open Market Committee’s report due at 2:15 p.m. today, and close attention will be paid to the comments in the report for any hints of when the Fed might ease off of their current easy money strategy.
At the close, the Dow Jones Industrial Average (DJI) was down 49 points to 10,452, the S&P 500 (SPX) fell 6 points to 1,108, and the Nasdaq (NASD) lost 11 points to 2,201.
The NYSE traded 1.2 billion shares with decliners ahead of advancers by 3-to-2. On the Nasdaq, declining stocks led by 2-to-1 on volume of 575 million shares.
Despite a rising dollar, January crude oil rose $1.18 to $70.69 a barrel for the first increase in price since Dec. 1. The Energy Select Sector SPDR (XLE) gained 18 cents to close at $56.28.
February gold fell 80 cents to settle at $1,123 an ounce, and the PHLX Gold/Silver Sector Index (XAU) fell $3.22 to close at $171.16.
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What the Markets Are Saying
You have read about the “January Effect” here for several weeks, i.e., the historical record of more strong than weak stock prices in January. But Dorsey Wright & Associates, known for their excellent point-and-figure technical analysis, had a great piece on it yesterday, which I will summarize here:
1. Before December, lagging money managers will cut their losses in small-cap stocks and jump to blue chips to avoid ending at the bottom of the performance rankings and loss of their jobs. Then, in January, they re-establish their aggressive positions, thus creating demand and higher prices for small-cap stocks.
2. Historically, small stocks tend to outperform the rest of the market in January, but recently the trend to small stocks has begun in mid-December.
3. The lower the institutional ownership in a stock, the greater the January Effect.
4. The January Effect’s largest impact on the market usually follows a year of big losses.
5. The January Effect tends to be greater when the dollar is strong.
6. The January Effect is most influenced by the reinvestment of year-end bonuses, distributions and gifts–the biggest impact being from corporate retirement plans.
7. Money managers are more likely to buy riskier stocks at the beginning of the year, and then bring their portfolios into alignment with the S&P 500 as the year progresses.
This year we saw the small- and mid-cap stocks begin a significant rally with reversals up in the S&P SmallCap 600 Index (SML) and Russell 2000 (RUT) on Nov. 30. Yesterday, they both had minor reversals down, which are no doubt the result of traders booking profits before year-end.
A pullback to the 50-day moving average of either could be a great place to jump on board. The 50-day moving average for the S&P 600 is around 314, and it’s 595 for the Russell 2000.
Today’s Trading Landscape
Earnings to be reported: Joy Global, Apogee Enterprises, Herman Miller, Hovnanian Enterprises, Martek Biosciences Corp., Nordson, Orleans Homebuilders and Paychex.
Economic reports due: MBA purchase applications, consumer price index (the consensus expects 0.4%, and 0.1% ex-food and energy), housing starts (the consensus expects 575,000), EIA Petroleum Status Report, FOMC meeting announcement (the consensus expects interests to be 0% to 0.25%).
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