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TECHNICALLY SPEAKING: January Warning For 2007 Sounded January 10, 2007

Posted by notapundit in Economic News.
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NEW YORK (Dow Jones)–It’s official: This season’s run of unseasonably warm weather not withstanding, the temperature according to the January Barometer and other stock market early warning systems is quite chilly for 2007.

The first ominous indicator was sounded at Tuesday’s market close, which wrapped up the first five days of trading for the new year.

The Standard & Poor’s 500 Index finished the five-day period with a loss of 0.44% and the Dow Jones Industrial Average fell 0.37%. The Nasdaq Composite has been the only star of the three big-cap indexes, rising 1.18%, potentially telegraphing some 2007 strength for technology.

The fact that the S&P 500 dropped does not portend well for 2007, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac.

Starting in 1950, the index has dropped 21 over the first five days of a new year. Of those periods the S&P 500 went on to decline 10 times and rise 11 for the full year.

“This can be an early warning signal,” Hirsch said.

That’s because the S&P 500 has a much better track record when it rises over the first five trading days. It has done so 36 times from 1950, and 31 of those time went on to a full-year gain. That’s an 86% success rate and the advances were sound, averaging 13.7%.

According to Hirsch, “The fact that we had a soft Santa Claus rally (which he defines as the last five trading days of the old year and the first two of new) and we are seeing these signs of the market struggling, we could be in for a correction.”

Now that the first five-day early warning signal is in, Hirsch and other market participants are waiting to see how the “January Barometer” fares.

The barometer serves as another gauge of potential threats to how the stock market will handle the full year.

The S&P 500 has been down 21 times in January from 1950 and, without exception, the drop has been followed by a new or extended bear or flat market, Hirsch said.

Conversely, there were 36 positive Januarys from 1950, and the S&P rose 33 times for that full year.

“This has proven an important seasonal phenomenon worth following,” said Jeffrey deGraaf, chief technical analyst at Lehman Brothers.

One potential offsetting factor is that pre-election year forces are in play this year.

Incumbent administrations tend to prime the pump to ensure their party’s reelection the following year. Among other things, that largess can find its way into corporations, lifting profits and raising stock prices.

In fact, during pre-election years the S&P 500 has not fallen since 1939, Hirsch said.

Lehman’s deGraaf adds that another fairly reliable indicator is whether or not lows made in the preceding December are held or not during the first quarter of the following year.

The S&P 500 was recently trading at 1408. The December 2006 low for the index came on the first day of December, 1385.93.
“If this level is violated during the first quarter, a bearish signal will be given, foreshadowing muted returns,” deGraaf said.

All of the indicators do have a following but can seem a stretch to others. The indicators are definitely founded in logic, Hirsch said.

“This time of year is a crucial one because people are making decisions about what they expect or will do for the rest of the year,” he said. “It’s like a microcosm for the full year.”

By Karen Talley, Dow Jones Newswires

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