Stocks leapt forward at the opening yesterday following gains in Europe and better earnings here at home. The Stoxx Europe 600 Index rose 1.8% and Germany’s DAX gained 2.4%, while France’s CAC 40 gained 2.7%. The gains in Europe were attributed to rating agencies saying that the AAA ratings of France and Germany will not be cut.
At the close, the Dow Jones Industrial Average had gained 69 points at 12,462, the S&P 500 rose 11 points to 1,292, and the Nasdaq gained 26 points to close at 2,703. NYSE volume was 840 million shares, and the Nasdaq traded 478 million shares. Advancers exceeded decliners on both exchanges by about 3-to-1.
Quality dividend-paying stocks have been propelling the market since early December. Thus the Dow, with 30 quality stocks, has been finding the going a lot easier than more speculative indices. The breakout from the 12,300 line is not confirmed, setting up a new trading range at 12,300 to the July high at 12,800. Even at these relatively lofty levels the stochastic turned higher and issued another buy signal despite its overbought condition.
Like the Dow, the S&P 500 has confirmed its break from the trading zone that had dominated trading since July. But the S&P 500 lacks the gusto of its higher-quality cousin, and its breakout lagged the Dow’s confirmation by more than a week. The breakout sets up a new trading zone at 1,285 to 1,348.
The Nasdaq, with the most speculative stocks, finally broke out with gusto yesterday, gapping through the bearish resistance line that has plagued it since October. But it has yet to exceed the October high at 2,753. Until it penetrates that high, the break to a new trading zone will not be confirmed. Like the other indices, its stochastic is also overbought.
Conclusion: With all three of the major indices now in positive territory, and two with confirmed changes in direction, the path ahead is up. And so the phenomenon known as the “January Effect” has moved stocks forward as new IRA and 401(k) money is invested. And additional purchases are the results of investors who have sold stocks for tax reasons and institutions that have sold for window-dressing reinvesting the funds in the new year. (If you’re looking for profitable option trades in the new year, you may want to check out my colleague Joe Burns.)
There is also the theory devised by Yale Hirsch in 1972, which states, “As the S&P 500 goes in January, so goes the year.”
Since 1950, the theory has worked 88.5% of the time. The Hirsch organization also notes: “The last 38 up First Five Days [of the new year] were followed by full-year gains 33 times for an 86.8% accuracy ratio and a 13.9% average gain in all 38 years… Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.
Currently our internal and sentiment indicators are overbought, and thus we should experience a run of profit-taking. We should be buyers on the pullback with the hope that another Wall Street saying is correct: “As goes the first week of the new year, so goes the month, and so goes the year.”
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
