Will 2009 Be Profitable? Today's Results Might Tell Us

Many investors hold one of two main beliefs regarding the significance of the month of January. One theory holds that as January goes, so goes the entire year. For these believers, the road to February will be a long one, marked with earnings reports and economic announcements.

A second camp holds that if the first five trading days of a given year are positive, the remainder of that year will be positive as well. For these investors, the entire year is riding on today.

It may seem absurd to base a full year on five days, but of the last 36 times the first five days of the year were positive, full year gains occurred 31 times-an 86% accuracy ratio. As of Wednesday's close, the Dow Jones Industrial Average (Dow) was 7 points lower for the year. All we need is a positive close Thursday and 2009 could be a good year for investors.

If today's results indicate that we will finish 2009 profitably, is now the time to buy? Probably not.

Even though countless amounts of time, effort, and money are used to explain daily market movements and what they mean for investors, most price changes offer little predictive value. However, key inflection points occasionally have a profound impact. We are on the cusp of such an event.

Since bottoming in late November, markets have rebounded sharply. Is this a bear market rally, or the start of a new bull market? Answer this question successfully and great gains will come your way. Knowing that more money is lost on false bear market rallies than the initial price decline, we must be cautious and resist the temptation to chase each rally. However, if you miss too much of an initial move, your performance will suffer.

Looking at the long decline of this market, stock prices have turned lower as they reached a persistent downtrend. The S&P 500 (SPY) and NASDAQ (QQQQ) are now approaching this resistance level. Will the rally stall as it has before, or finally break higher? A close above 965 on the S&P 500 and 1,700 on the NASDAQ would be extremely bullish events that indicate the primary trend is turning bullish. With current prices only 6% from these levels, our answer should be delivered soon.

The most prudent investment stance is to watch these price points closely before allocating capital. If the market closes above those prices on decisive volume, it would be an indication that the lows are in place and now is the time to buy stocks. Failure to overtake resistance will increase the chance that the lows will be retested.

Mostly likely, this rally will fail and new lows await us in the future. Looking at a series of sentiment indicators, the market is overbought. When stocks bottomed in November, my timing model was 100% short-an extreme oversold condition. (My model is neutral when it is between 40 and 60% long. Any reading above 80% in either direction is considered overbought/oversold.) Now it is 70% long. In November, my research universe showed over 60 stocks trading below fair value. Now fewer than 20 stocks are below fair value, and most of them are cheap for a reason. Despite traders openly speaking about the need for prudence, the most speculative stocks have rallied the most in 2009. This trend indicates the desire to take risk. More people are investing out of fear they will miss a market rally, rather than showing concern over protecting their capital.

An overbought, speculative market approaching a long-standing downtrend is the perfect recipe for a failed rally. Therefore, it offers aggressive traders an opportunity to get short of this market. By using a 3% move higher as your stop loss, you can reduce the pain of prices moving against you. However, if this rally falters as I expect, great gains will come your way.

Comments

[ricccc:]

If this is a bear market rally, and new lows will be tested, will companies that benefit from the programs that our new president initiates, rise in spite of a bear market?

Jan 08 08:18 AM

[William Samedy:]

Like J.P Morgan said once market will do what they always do fluctuate :)

Jan 08 08:31 AM

[Crookedwood:]

If we are to test new lows and I believe we will then it is the moment for the youthful investor to buy and hold and for those in our later years to manage our trading within very tight parameters. Crookedwood

Jan 08 09:20 AM

[Glen L.:]

Obama just said to expect trillion dollar deficits for many years, and ALL the economic news is bad and getting worse. Read the Dec. 15th FOMC report (if you can stand it) if you want _really_ bearish news. It is incredible to me that anyone would base a 2009 prediction on the past -- clearly this is a down-market year with no prospect of improvement, and with our beloved government throwing trillions down the rathole I see none for the next 4 years either.

Believe me, I will take no pleasure in being right, but I will prosper as long as I can find suckers willing to bet against me. And if I'm wrong, I'll pay the bets with a grin.

Jan 08 10:52 AM

[John Lounsbury:]

Glen L. - - -

You, and many others. are misquoting Obama. He said that IF WE DO NOT TAKE CORRECTIVE ACTION trillion dollar deficits will occur for many years into the future. The question is: Can (will) he (or Congress) take the corrective action?

All that aside, I lean toward the bearish views that you and Sean have expressed.

Jan 08 02:20 PM

[orlando vac...:]

It does not look profitable for hotels in Orlando in 2009.....

Susan

Jan 08 04:28 PM

[henarl:]

John: What :corrective actions do you propose that Obama and Congress should take to eliminate future trillion dollar deficits ?

Jan 08 04:33 PM