Happy Start to New Year!

01/05/2009 11:42 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says the broad market started off strongly, and some sectors even broke out of their trading ranges. 

Kicking off the New Year with a rally almost seems appropriate following last year’s disaster as investors expressed relief to be rid of 2008—and even showed some optimism for 2009. The broad market indices gained more than 6%, and this week we will take the real pulse of the investor as Wall Street returns to work following the holidays.

Nonetheless, the real money remains in money market accounts. According to the Investment Company Institute (ICI), the current amount in money market funds—$3.83 trillion—is the highest in the history of tracking such data.

Why? Last year’s 38.5% loss for the Standard & Poor’s 500 index would be one solid reason; another is fear. Economic data are still heading down and have yet to improve enough to evoke any confidence. Friday, the ISM’s Manufacturing index slid to 34.2, the worst reading in 28 years. Europe showed the same type of decline in manufacturing as well. This is the kind of data that keep investors on the sidelines and away from equities.

Then, why the jump start to a new year? (Stocks were down in early Monday trading amid fears of even more poor economic reports in the days ahead.) Investors are hoping this will be a better year than the one they just experienced. We can all argue over how oversold the market is, but it will take optimism about future growth before stock prices start to rise in earnest. This week and the month of January will set the tone for the new year.

Since all ten sectors we track were winners last week, I get to have a positive tone for a change (see table below).

Energy was the clear leader, gaining 10.1% as crude rose by more than 16% for the week. This has sector may be oversold and due for a bounce. Yet caution is advised as the bounce in the sector comes on lower volume. The catalyst for a continued rise in energy would be if equities to continue to rally. The two are linked by sentiment towards the economy. Additional benefactors of the rise in crude oil prices were natural gas—up 7% from the intraweek low—and coal, up 16.3%.

Industrials gained 8.1% on the week as Obama infrastructure plays led the sector higher in anticipation of the new administration’s stimulus package. But the sector may be ahead of itself and set up for disappointment. Basic materials gained 8%, aided by the move in crude.
Retail pushed the consumer services sector higher by 7.4%. The hope is that the worst is over for the consumer. But the jury is still out on that as all eyes will be on the December sales data. I still believe discounters will be the clear winners for the month and quarter.

Two sectors making moves worthy of note this week were technology (+7%) and financials (+6.5%). They are the largest sectors of the S&P 500, accounting for more than 33% of the index weighting. Their leadership goes a long way towards building confidence in the future growth of the broad markets. These are two sectors to watch this week to set the tone for what lies ahead.

One last sector to look at is health care. It wasn’t the leader, gaining only 4.7% on the week, but the index was the first to break above its 50-day moving average and has been in a solid short-term up trend since hitting a low on November 20th. The October highs are the next hurdle for the sector.

Technically and fundamentally the drug stocks are showing signs of improvement, leading the subsectors to push the broader index higher. Biotechnology has made a solid contribution as well with the index breaking out two weeks ago.

A positive start to the new year is great, but don’t get caught up in the emotions of it as there is plenty of work left to be done. Take what the market gives, protect your gains, and play with discipline.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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