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As the First Week Goes for the Market, So Goes the Year? Not Necessarily.

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Rather than the January Barometer, a better indicator of what's to come might be the December Low.

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It's that time of year again when the media is abuzz with that old stock market saying, "So goes the first week of the new year, so goes the month and so goes the year." Admittedly, the January Barometer has a pretty good track record. To wit, according to the Stock Trader's Almanac (as paraphrased by me):

Devised by Yale Hirsch in 1972, our January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only seven major errors since 1950 for an 88.5% accuracy ratio. ...Including the seven flat-year (minor) errors (less than +/- 5%) yields a 77.0% accuracy ratio.

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.

Now given that historically the equity markets have a bullish tilt 67% of the time, the first week of the new year typically gives the January Barometer a bullish start for the month. This year is no exception with the first four sessions of the year lifting the S&P 500 (SPX) 20.21 points, or 1.61%. However, 1.55% of last week's rally occurred on Tuesday when the SPX vaulted 19.46 points. Subsequently, as stated in that morning's verbal strategy comments:

That said, the NYSE McClellan Oscillator is short-term overbought and the stock market's internal energy has not yet been fully recharged. Accordingly, it would not surprise me to see a pullback. ...Consequently, I would not chase the dragon right here since I anticipate an upside-blow off is due.

To be sure, Tuesday's Triumph certainly felt like an upside blow-off with the Dow Jones Industrials (INDU) tagging 12,479.65 intraday before surrendering 83 of those points into the closing bell. That action left the senior index struggling for the balance of the week as it closed roughly 120 points below Tuesday's session high. Still, the first week of the new year was "up," causing one Wall Street wag to chant, "so goes the first week of the new year, so goes the month and so goes the year." Yet, there is one indicator that I give more credence than the January Barometer.

Back in the early 1970s, when I was working on Wall Street, I encountered a man who became my friend and one of my mentors. At that time Lucien Hooper, then in his 70s, was considered one of the savviest players in this business; he was also the contributing editor with the second-longest tenure at Forbes magazine.

While Lucien was known for many market axioms and insights, the one that stuck with me the most was his December Low Indicator. It seems as if only yesterday we were sitting at Harry's at the Amex having lunch when he explained it.

"Jeff," he began, "Forget all the noise you hear about the January Barometer. That being, 'so goes the first week of the new year, so goes the month and so goes the year.' Institutions can manipulate prices for a short period of time, especially during a holiday-shortened week with a limited audience. Consequently, pay much more attention to the December low. That would be the lowest closing price for the INDU during the month of December. If that low is violated during the first quarter of the New Year, watch out!"

For the record, the Dow's closing low in December was 11,766.26, recorded on December 19, 2011. Circle that low and watch it closely during the first quarter of 2012. If the Industrials travel below that low, then respect Lucien's "watch out" warning, for it has proven prescient; in all but two instances since 1952, when the December low was violated during the first quarter, the Dow slid another 11% on average.

Importantly, if the December low is not breached in the first quarter, heed the January Barometer since when taken in conjunction with the December Low Indicator, it has been right nearly 100% of the time.

So, other than the first week of the January Barometer, what else happened last week? Well, beginning with the technicals, both the INDU and the D-J Transports made new closing reaction "highs." There was a "golden cross" when the Dow's 50-day moving average crossed above the Dow's 200-DMA. And, that action broke the Dow above what a technical analyst would term the "neckline" of a bullish reverse head-and-shoulders chart pattern.

Moreover, last Tuesday's upside gap in the S&P 500's futures chart was "closed" on Thursday (read: bullish) as participants continued to buy the dips. Nevertheless, I am sticking with my short-term cautionary "call" because the stock market is still overbought in the near-term and a lot of internal energy has been used up in the ~10% rally that began around Thanksgiving. Additionally, there was every reason for stocks to rally on Friday's positive jobs report, but instead there was little reaction.

As for the week's fundamentals, of the 16 economic reports, 10 beat expectation, five were below estimates, and one was in line. Plainly, the employment numbers improved and the ISM Manufacturing report rose to its highest level since June. China's Manufacturing PMI rose while its PMI Services Index jumped above 50, German unemployment fell, eurozone's CPI moderated, and the euro basis swap eased.

On the negative side, our ISM Services report was below estimates, refi applications declined by 2.5% with purchases down 9.6% despite lower mortgage rates, December retail sales were a touch "light," and UniCredit (one of Italy's largest financial institutions) stock collapsed 38.6%, heightening fears about Euroquake.

Speaking of share price collapses, Acme Packet's (APKT) stock has collapsed from last May's high of $84.50 into last week's $25.20 intraday low punctuated by a disappointing earnings preannouncement. My firm's fundamental analyst (Todd Koffman) has been negative on Acme Packet since initiating research coverage on May 23, 2011. On last week's announcement the shares gapped lower, causing Todd to raise his rating to a Strong Buy with these comments:

We are upgrading Acme Packet to Strong Buy from Underperform. Our upgrade is based on our view that wireline VoIP (voice over the internet) is in the early innings and wireless VoIP has yet to start. While the company has had a number of missteps, we believe incumbent telcos are transitioning from circuit switched voice to native voice over IP. The U.S. is leading the charge. Line data is difficult to come by, but our estimates suggest less than 10 million of the 60 million business phone lines (U.S. only) have converted from legacy circuit switched voice to native voice over IP. We note, international markets are even further behind. Recent missteps reflect exaggerated expectations complicated by unusual buying patterns. We believe these potholes will temper management expectations and provide a realistic base for future growth. Further, we expect Verizon (VZ) and AT&T (T) to deploy wireless VoIP using Acme session border control capacity in late 2012.

The call for this week: It's pretty amazing that the equity markets have rallied in light of the super strong US dollar. That action suggests that stocks are not quite ready for the pullback I have been expecting following last Tuesday's upside blow-off. Still, while the Dow Industrials and Dow Transports have tagged new reaction highs, the SPX and NDX have not. Such divergences always leave me in a cautious mode, especially since we are past the seasonally sweet spot for stocks. At some point we are going to get a profit-taking event, whether it is from last Tuesday's intraday high (1284.62 SPX) or the 1300 – 1320 overhead resistance zone remains to be seen. Until that pullback occurs, there just isn't a whole lot to do on a trading basis.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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