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Sunday, 01/25/2009 7:40:18 PM

Sunday, January 25, 2009 7:40:18 PM

Post# of 83
Will January Be the Cruelest Month?
Market's Performance (Down About 8%) May Hint at Rest of Year (Gulp!)


What the market does in January often foretells how U.S. stocks will perform during the rest of the year. It is looking rough so far.

Both the Dow Jones Industrial Average and Standard & Poor's 500-stock index are down just shy of 8% in January. Last Tuesday's nose dive of 4%, the worst Inauguration Day showing ever, left the Dow below 8000 for the first time since its November bear-market lows. Bad news about banks has pulled other sectors down, and fourth-quarter earnings have mostly been duds.

No wonder "people are hesitant to get into this market," said Thomas Nyheim, vice president at Christiana Bank & Trust Co. in Wilmington, Del., with $4.4 billion under management. "We've seen mostly negative signals."

It will take a huge rally this week for major indexes to break even, let alone gain ground, for the full month. For now, the S&P 500 is on track to dethrone its worst January on record when it fell 7.7% in 1970.

Historically, January often augurs how the rest of the year will go, although this is hardly a perfect portent. Over the past 10 years, January correctly predicted the future seven times.

When the S&P falls in January, the index loses an average of 2.4% in the next 11 months, according to data going back to 1950 from Ned Davis Research, a Venice, Fla., research firm and investment adviser. When the S&P rises, the index posts an average gain of 12.3% throughout the rest of the year.

The Dow's pattern is similar when it comes to gains. A positive January led to an average increase of 9.8% over the rest of the year, according to Ned Davis Research. A negative January led to gains that averaged just 1.6%.

January usually gets a boost from money flowing into retirement accounts as the new year begins. Investors tweak their asset allocations, and if the market has been strong recently, they might put more money into stocks, said Mr. Nyheim.

This month, though, many clients have called to ask Mr. Nyheim about moving more money into bonds, because they are uncomfortable with stocks after the market plunges of late 2008.

Year-end bonuses can translate into a flurry of stock investments in January, said Ed Clissold, senior global analyst at Ned Davis Research. But "who got a bonus last year?" he said. In addition, January tends to be a weak month for initial public offerings even when the market is doing well, so there is little supply of new shares to tempt investors.

It doesn't help that mutual-fund redemptions are taking wind out of the stock market. As of last Thursday, $10.76 billion had flowed out of stock funds this month, according to an estimate from TrimTabs Investment Research. Unless the tide suddenly reverses, January will be the eighth consecutive month of outflows from stock funds.

In the first half of the month, as investors anticipated the inauguration of President Barack Obama, there was "a window of uncertainty and inaction," said Richard Campagna, chief investment officer at 300 North Capital LLC in Pasadena, Calif. "It created a void and sent the S&P 500 lower, driven by the financials."

So far, the Obama administration hasn't calmed the market, especially financial stocks. "Everyone, including me, thought there would be an Obama honeymoon market run, and we never saw that," said Terry Morris, senior equity manager at National Penn Investors Trust Co., of Wyomissing, Pa., with $2 billion under management.

Last week, financial stocks were overwhelmed by news that the U.K. government would have to expand its financial-rescue plan. A pile of unrealized losses at asset manager State Street Corp. was yet another blow to investor confidence. On Inauguration Day, the financial sector of the S&P 500 lost 16% of its value.

Financials now make up 10.3% of the S&P 500, down from 18.6% at the end of January 2008. About a quarter of the companies in the S&P 500 have reported fourth-quarter earnings so far. Most have been financials, and they have largely looked even worse than the low expectations investors had heading into earnings season.

Even shares of financial institutions that outperformed their peers last year are heading south. Mr. Morris holds Wells Fargo, which has been walloped by fears it will need more capital to absorb Wachovia, which was acquired by the San Francisco bank last month. Wells Fargo is down 46% in January, compared with a 2.4% decline for all of 2008.

Amid recession, Mr. Nyheim, the vice president at Christiana, a unit of National Penn Bancshares, said he has been buying short-term, high-quality bonds and is investing in companies such as Walt Disney and Abbott Laboratories for clients who can wait longer for returns. "We have a lot of older clients, with a shorter time horizon," he said. "I have heard a couple say they don't even buy green bananas."

Battered investors may want to pray for a reprise of 2003. After falling in January, the Dow and S&P 500 soared about 30% over the next 11 months. That turnaround also followed the bear-market lows of 2002. "I could see a down January, but an up year" in 2009, Mr. Campagna said

frenchee #board-4258 TSP Trend Timing: EFA (I), AGG (F), SPY (C), and VXF (S)

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