Barring a massive rally today, it looks as though January is going to end down. The January barometer that states "as goes January so goes the year", points to a down year in 2005. This is in direct confliction with the fifth year of a decade, which for the last 120 years has been positive. The January barometer has had about a 65% accuracy reading but that is surely not as good as year five. At the same time year five is only once out of ten years while January is every year or ten times more than year five. >From a statisticians perspective, which we are not, this is significantly more valid data. Speaking of data., our only goes back to 1915 but what we did see is that in every previous fifth year from 1915 January was higher not lower. Of course to draw any conclusions from this alone would not make a lot of sense since we do not have any historical precedence. Nonetheless, it is an interesting piece of information given that coming into the year investors were of a single mind that it was basically their right to have an up year as year five has not failed them yet. It has not only become Wall Street but main street that year five is always up. When any indicator becomes this popular, to the degree that year five has become it is usually at a point of maximum recognition, and that is usually a place where it begins to fail.
As for us, while January and year five are interesting in their own right, we do not and never have relied on these as a means for our market outlook. That is to say we would not be bearish for 2005 based on January alone, we need to wait to see who wins the super bowl. All kidding aside, while 65% is quite good, especially when it comes to the stock market, there is still a 35% possibility of January being wrong. In our opinion, the only importance that we see from January and year five history is how it affects investors and traders expectations, which in turn has a direct affect on the technical indicators and price structure.
In this regard, we came into the year with high expectations for January to the point of a near universal view that January was going to be not only an up month but a fairly dynamic up month. This as reflected in a number of our sentiment indicators, which had hit their highest levels since early 2004 and some even exceeding those levels. The market did what it usually does, and that was to make the majority wrong by moving lower not higher. The averages have given back all of what they gained in December at Friday's low. The decline has produced some improvement in some of the indicators. The AAII survey and the CBOE put to call ratio are the most notable of those measures that have shown a decent level of improvement. The 10-day moving average of the CBOE put to call ratios moved to the very low end of bullish mid week last week and AAII has reported more bears than bulls two of the past three weeks. This is a far cry from December when we had five weeks of over 50% bulls and four weeks bears in the high teens. At the same time, the longer term measure of AAII, Bulls divided by bulls plus bears is just slightly below the low end of bullish. Some of the other surveys are showing some improvement but not a lot considering the extent of the losses in January. Market Vane is still over 60% bulls and Investors Intelligence while improving from where it stood in late December is far from even high neutral. One of the functions of a correction is to relieve the excesses that had built up in the previous rally. What we have seen so far is at best a minor improvement but far from what we would view as successful.
The majority of the primary momentum indicators made their low in either the first or second week of January. This lead to a minor divergence at the January 13 low and to a bigger potential divergence at the January 24 low. The initial divergence lead to a minor bounce into January 18 that was followed by lower lows, setting up the second divergence. The rally following the second divergence on January 24 has not failed as yet but the rally from that low, so far at least, has been less than what we saw at the mid month rally. While it is too early to say that it has failed, all that it has accomplished to this point is to relieve the recent oversold condition with most of these indicators moving to neutral. The price/indicator relationship looks to be 180% opposite of what too place following the November 4 momentum thrust where the first several divergences failed to move prices lower. In fact, the first month after the initial momentum peak on November 4 the McClellan oscillator moved from +181 to -141 while the S&P moved from 1143 to 1190 or just over 4% on a closing basis. The point is that so far oversold and diverging indicators has lead to little if any movement in price and certainly has not produced anything close to confirming the potential divergences as real. This to us is as bearish as the action from early November to early December was bullish.
As we pointed out in the report, the new highs in the fall above the early 2004 peak left a huge number of negative divergences in place not only from the primary indicators but a large number of medium and long-term measures as well. These include but are not limited to 13-week RSI, the % of stocks above their 200 day moving average, the new highs both daily and weekly and the McClellan summation index. In addition, the weekly trend oscillators turned down two weeks ago and last week confirmed a bearish signal. In addition, the trend indicators also left a bearish divergence with their mid 2003 and early 2004 peaks. We had been approaching the post January 3 decline as a short-term affair but given the weakness in the weekly indicators it is beginning to look as though it may be more of a medium-term pattern. However, on the latter score this has not yet been confirmed although it is getting close. Short-term as long as last weeks low holds we see the strong possibility of further gains and a challenge of more important resistance. This on the S&P would be in the 1183-1186 area as that is not only a .618 retracement of the post January 18 decline but is also the area of the gap left in place on January 20. We are neutral short-term. Medium-term we are neutral but with a more negative bias. Long-term we are bearish.
Larry Katz
email me at: lk1618@comcast.net
website link: www.marketsummaryandforecast.com
Larry Katz serves as both editor and research director of Market Summary and Forecast. Mr. Katz is a full member in the Market Technicians Association and is both one of the founders and the president of their Southern California Chapter. He also serves on the management committee chairing the membership committee. Mr. Katz is a regular contributor to Top advisors corner on America On Line. He is a regular guest on the Business Channel in Los Angeles with Richard Saxton. He has been a quest speaker of the Market Analysts of Southern California (MASC), the Omega users group of Thousand Oaks, Ca. and Orange County, the Market Technicians Association Atlanta Chapter as well as the Foundation for the Study of Cycles. He also ran a workshop at the Market Technicians Association 1999 Annual Seminar. He has been a regular commentator on the Reuters Financial network, both in the US as well as in Japan, as well as being published in the Market Watch section of Barrons Magazine on a number of occasions. He is currently ranked in the top five for intermediate term gold timing by Timer Digest.
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