Business News

January not a Jonah

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by Peter Switzer

There are two big questions as we greet the first trading day of February. The first is, are we in for a 10 per cent plus drop correction in the stock market? And second, will the January Effect determine what happens to our investments over the course of this trading year?

Rules of thumb

History shows that in three out of four years, if January is down then the market ends down for the year. Last year was an exception with January down a massive nine per cent but the year ended with a 23 per cent gain. Remember the US market went up around 60 per cent from the March low.

However, there is another rule of thumb that could please the optimists. This one says if January starts with five days of rises in a row then a full year gain is highly likely. In fact, this has worked out in 31 of the past 36 years.

This year actually did start with five successive gains and so there’s one for the optimists as well as one for the pessimists.

Data watch

If you looked at the consensus for global economic recovery you would have to be in the optimist camp with the IMF raising its outlook for world economic growth to 3.9 per cent this year and 4.3 per cent next year.

And what about the Yanks on Friday registering an economic growth rate of 5.7 per cent in the fourth quarter. Meanwhile, the Chicago PMI, which measures the demand from purchasing managers in factories spiked to 61.5 and to keep the good vibes coming consumer confidence hit a two-year high.

At home, we’re doing so well that most economists think we could see an interest rate rise tomorrow. I hope they are wrong but the confidence reflects how our economy is improving.

Market negativity

So, what about correction talk, with some Smart Alecs suggesting a 20 to 50 per cent crash is possible.

I can’t see it, but a 10 per cent or so fall is possible because the run up last year was so big.

The negative stuff around now is not because economic and corporate earnings are disappointing — they’re not. In fact, they are better than expected.

The pullback recently relates to China’s wise attempts to beat inflation by slowing down its 10.7 per cent growing economy and President Obama taking a big regulatory stick to the greedy bankers in the US. And then there is Greece, which is spooking bond players.

Part of the sell off could relate to the fact that the market gets about six months ahead of itself — it looks into the future and trades accordingly. Ahead in the US lies interest rate rises, though Bank of America-Merrill Lynch thinks it won’t happen until 2011, which seems later than what most experts think.

Also you can’t rule out the likes of Jimmy Chanos, a hedge fund manager who has been trying to portray China as a bubble waiting to burst to help his short positions.

Market movements

The key level on the S&P 500 is 1011, which is where the 200-day moving average is around now. The S&P index is at 1073 and this needs to be watched, however plenty of experts think there will be a fair bit of market support around 1011.

My view is that a sell off or even a 10 per cent correction is a buying opportunity for long-term traders. The American Association of Individual Investors recently conducted a poll and the split between bulls and bears was almost even. In the past, the bulls easily outnumbered the bears.

Jumping hurdles

There are a lot of hurdles — economic and financial — to beat this year but I think economic readings and corporate earnings results will prevail.

And that’s why I don’t think January will be a Jonah this year and Deutsche Bank’s chief equity analyst Tony Brennan agrees with his tip for our S&P/ASX 200 pencilled in at the 6000-level for 2010!

PS: Remember, SWITZER is back tonight on Sky News Business Channel at 7pm and 10pm.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, February 01, 2010