January 2010 Market Wrap
February 24th, 2010
January most likely caught everyone by a bit of a surprise. The Major Averages posted losses that ranged from 3.46% (Dow 30) to 6.41% (Naz 100). Two sectors that were beneficiaries of upside momentum in 2009 (Materials and Technology), lost 8.66% and 8.45%, respectively, in January. By contrast, in 2009 Materials gained 45.22% and Technology gained 59.92% making these sectors the strongest, by far, for the year. Healthcare was the only winning sector in January with a 0.42% gain and is presently among the least weak for February. Interestingly, Healthcare and Consumer Staples have the reputation of being defensive and somewhat of a hedge against broadly falling stock prices. Whether or not the sector trends are accurately predicting the next market phase is yet to be determined. What is becoming clear is the changing tendency and willingness of investors to “sell the news”. That sentiment was mostly absent during March-December 2009.
Three of the four Averages set their highs for the month on January 19 while Naz 100 set its high on January 11. All four Averages set their lows on the final day of the month and posted declines from the monthly highs as follows: Dow 30 -6.39%, S&P 500 -6.85%, Naz 100 -8.61%, and Ru 2000 -7.49%. February lows across the board are already below January lows indicating intensifying distribution.
While a bout of profit-taking should not be surprising given the furious rally from March 2009, there are increasing tensions developing with China over our dealings with Taiwan as well as growing concerns regarding the government’s ability to deftly unwind the massive emergency liquidity programs. Interest rates have to rise and the programs have to be unwound. The question is how investors will, both domestically and globally, react to the US markets when either or both of the inevitable “deliquifying” processes begin.
The Economy
· Advanced Q4 GDP came out on January 29 at +4.5%; below the consensus estimate of +5.7% but the second straight quarter of GDP expansion after a record four consecutive quarters of GDP contraction. Final Q3 GDP was the lowest of the three estimates so these data are subject to significant change. Preliminary Q4 GDP comes out on February 26.
Employment
· On February 3, ADP reported January Employment of -22,000 (est. was -30,000). This was the tenth consecutive month-over-month improvement in the series but also the twenty-fourth consecutive month of job loss.
· On February 5, BLS reported Non-Farm payrolls for January at -20,000 (est. was unch’d). There was a wide array of revisions to 2009 Employment data that showed eleven negative revisions and one positive revision. The net effect was an additional 617k more job losses in 2009 that previously reported.
· Unemployment edged down to 9.7% (est. was 10.1%).
The Market
During the rally since March 2009, the longest period of correction is four weeks for Dow 30, S&P 500, and Naz 100 while Ru 2000’s longest corrective period is five weeks. These periods occurred in the June-July time frame when the Averages lost between 7.74% (Naz 100) and 11.63% (Ru 2000). From the 2010 highs three weeks ago (four weeks for the Naz 100), the Averages posted declines (at February lows) ranging from 8.34% (Dow 30) to 10.58% (Ru 2000). From a time and loss magnitude perspective, the broad market is at a critical juncture of psychological support.