As January Goes…?

02/02/2009 1:50 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, sees some new sectors exerting leadership as the market struggles to advance.

Investors are confronted with too many indicators—most are historical in nature, others are theoretical, and the remaining mythical. There were plenty of headlines this past week on the January effect, “as January goes, so goes the year”. If that’s the case—run! The broad market indexes were down more than 8% for the month and it was one of the worst January’s on record. Investors are scrambling for ideas that will rebuild confidence, and so far they have come up empty.

The challenge remains forward guidance, and that there is no growth on the horizon. Without at least a glimpse of hope, the downtrend will remain entrenched. The December economic data continues lower: fourth quarter earnings are down, revenue is down, homes sales are not improving, inventories are rising, and the list goes on. Until the data bottoms or gets better, the bears are in control.

Earnings data has become so questionable that companies are withdrawing their guidance for 2009. They have become as confused as investors are, on trying to predict the outcome looking forward. This puts fundamental analysis at an extreme disadvantage, and technical analysis isn’t doing much better short-term. The current trading range remains intact, but the major indexes are challenging support once again. In addition, eight of ten major sectors are sitting on key support levels. This week we will either bounce and move higher in the current range (800-920 on the S&P 500 index) or retest the November lows (742).

Short interest climbed last week as sentiment moved down and volatility picked up. Equity mutual fund outflows are up as well, averaging nearly $6 billion per week, and estimates are $23.2 billion for the month according to ICI (Investment Company Institute). This is up from the $19.9 billion in November and $20 billion in December. ETF assets are flat according to State Street. The primary reason is the increased interest in the short ETFs. ProShares doubled in assets during 2008 with the majority of that being in their UltraShort funds.

Scanning the sectors from last week we see confirmation of all the negative data. Seven of ten major sectors ended the week in negative territory. Healthcare, utilities, and energy are trying to move higher, but they lack the leadership to the take the broad market higher. Nine of ten major sectors were negative for the month of January. The one positive sector was utilities, up 1.4%. The biggest loser (not the TV show) was financials, down 23.8%.

Now that you are completely depressed, what are we looking at this week? Leadership, plain and simple. Technology and healthcare are two key pieces to the puzzle. Healthcare remains positive and the HMOs joined in last week with a solid move to the upside. I would like to see follow through for the sector and a move higher this week. Technology was on the rise, and earnings gave a gut check. I would like to see a break higher from the sector to assist healthcare in leading the market higher. In order for the short-term trend to gain any traction we need leadership, and these are two candidates to provide it.

The table below reviews the major indices and the ten major sectors. Be patient and don’t force trades. Many have called this a traders’ market, but that doesn’t mean everyone can trade this market. Know your limitations and stay focused on your goals and risk tolerance. I prefer to trade when the indicators are in my favor, and now is a tough time for anyone to trade this market successfully.

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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