January 2010
Monthly Review:

The 10-month robust rally we witnessed in the US equity market came to an abrupt end on January 22, 2010, sending the major averages back into a serious correction. Not surprisingly, the US dollar rallied smartly last month and closed back above its 200-day moving average (DMA) line for the first time since April 2009. The stronger dollar sent US stocks and a slew of commodities lower last month (more on that below) for their worst monthly decline since February 2009. In addition, investors remained concerned that the effects of the massive worldwide stimulus packages from 2008-2009 are beginning to wane and the future of the global economic recovery may not be as robust as initially expected. This robust 46-week rally was a bit odd in nature since it helped send the major averages to one of their strongest 10-month sprints in history and did so with only a dearth of high quality leadership participating. It is important to note that so far since that rally began, none of the major averages have pulled back more than 8-9% before the bulls showed up and sent prices higher. It is also important to note that since the March lows, the major averages have retraced (rallied back for) approximately +50% of their recent bear market decline, which is a fairly typical bounce before a new down leg ensues.
Earnings & Economic Data: B
Before we discuss the market’s action, let’s analyze how the market’s have reacted to the latest round of earnings and economic data. So far, the market has responded poorly which is not a healthy sign. The Labor Department said US employers slashed -85,000 jobs in December which fell short of the Street’s unchanged estimate. Meanwhile, the unemployment rate held steady at -10% which is near a 26-year high. However, November’s reading was revised to show a gain of 4,000 which was the first time US employers added jobs in nearly two years. Since the recession began, the US has lost 7.2 million jobs which is the largest on a percentage basis of all jobs since World War II ended in 1944-45.
During the latter half of January, stocks sold off as investors were concerned that Congress would not reconfirm Federal Reserve Chairman Ben S. Bernanke for a second term. However, those concerns were allayed at the end of the month when Dr. Bernanke received enough votes and won a second term. The economic news released last month was less than stellar, especially from the ailing housing market. This is best evidenced by the ominous price and volume action of the major averages.
The latest round of earnings data was also a disappointment as several high profile companies sold off after reporting their fourth quarter results. The latest round of corporate earnings continues to top analysts’ estimates but fails to impress investors as concern over future growth continues to weigh on stocks. Barring some unforeseen event, earnings will have expanded nearly +70% and snapped a record nine-quarter earnings slump. Longstanding readers of this column know that in addition to analyzing the numbers we pay equal, if not more, attention to how the market reacts to the numbers. So far, the reaction has been lackluster at best.
Market Action – In A Correction

The major averages topped out in October 2007 then proceeded to precipitously plunge until they put in a near term bottom in early March 2009. Since then, the market snapped back and enjoyed hefty gains which helped send the major averages to one of their strongest 10-month rallies in history. The small cap Russell 2000 Index was the standout winner, surging a whopping +90% before reaching its interim high of 649.15 on January 19, 2010. The tech-heavy Nasdaq Composite is a close second, having vaulted +84%, before reaching its interim high of 2,326.28 on January 11, 2010. The benchmark S&P 500 Index raced +73% higher before placing its near term top of 1,150.45 on January 19, 2010, and the Dow Jones Industrial Average soared +66% before printing its near-term high of 10,729 on January 19, 2010.
This data indicates that Tuesday, January 19, 2010 appeared to be a very important day for the market because that is the day that most of the popular averages placed their near term tops. Over the next few days, the market got whacked with heavy distribution and more negative reversal days (open higher and closed lower) which put pressure on this 46-week rally. Then on Friday, January 22, 2010 all the major averages sliced and closed below support (their respective 50 DMA lines) on heavy volume. The fate of the rally was sealed at that point because all the major averages entered a correction due to the series of distribution days negative technical action in the major averages and several leading stocks. As of this writing (January 31, 2010), all the major averages negatively reversed on a weekly, monthly and yearly basis which reiterates the importance of adopting a strong defensive stance until a new follow-through day emerges!

Until a new rally is confirmed, it is best to avoid new buys, since history shows us 3 out of 4 growth stocks follow the major averages. Remember to always keep your losses small and never argue with the tape. Looking forward, a new rally will be confirmed only when the market manages to produce a sound follow-through day. Until then, patience is king. No one knows for sure how low this correction will take the market, so instead of guessing we shall simply continue to react intelligently to what we see happening. This simple, yet effective, strategy has served investors well through previous bearish periods. As always, we will continue to objectively analyze price and volume to better understand the market’s underlying health.  Never argue with the tape, and always keep your losses small.

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