Friday marked month-end for January in the financial markets.  There have been many efforts out there to discuss the market’s direction, but perhaps the one issue that traders will be using to judge 2010 versus the run-up in 2009 this weekend is the notorious ‘January Barometer.’ The saying is, “As goes January, so goes the year…”  If the January Barometer is a real prediction tool, the markets just ended on a down note for the DJIA (-3.46%), the S&P500 (-3.7%), and the NASDAQ (-5.3%).  Without calling out any individual stocks, we will be looking specifically at the DIAMONDS Trust (NYSE: DIA), SPDRs (NYSE: SPY), and the PowerShares QQQ (NASDAQ: QQQQ) to track these indexes.  We want to look at a broader slate of issues and other calls on each.

The earnings reports from major companies have mostly been coming in at or above expectations.  The GDP for Q4 just came in at 5.7%, meaning that the recession is technically over.  Just two weeks ago the news was looking good for earnings season and we had a major rally behind us.  Yet, the markets have rolled over like there will be no tomorrow.  China announced that it wanted banks to halt loans to keep from bubbling over, and an IT-solutions provider to banks called Yucheng Technologies Limited (NASDAQ: YTEC) gave comments today that should show Chinese banks won’t be slow for just a few weeks.  We have also had a new wave of bank taxes proposed here in the U.S.  Then at the State of the Union this week, the hopes were dashed that the current low tax rates would be extended beyond this year.  Effectively, Obama targeted oil companies, banks (investment managers), and those making over $250,000.00 per year. And the ratings agency actions only magnify the sovereign debt rating downgrades we have seen of late.  Based upon the sell-off even in the good earnings reports seen, you can tell that money is being taken off the table even in what many considered as safe stocks.

Adam Hewison, one of our affiliates at INO, just yesterday gave a technology stocks call that could imply another 10% to 20% downside for the NASDAQ after a major trendline was crossed.  On that notion, we’d be looking at the PowerShares QQQ (NASDAQ: QQQQ).  Be advised, we will be challenging this notion over the weekend.  The fundamentals matter more to us than charts alone, but this time they are both lining up for what would be lower stock prices.

Then yesterday we took out 1,085.00 on the S&P 500 Index.  For this, we will look solely at the SDPRs (NYSE: SPY).  The DJIA also busted through the 50-day moving average with a vengeance, as did the S&P.  For this we’d look at the DIAMONDS Trust (NYSE: DIA).

• DJIA: 10,428.05 on December 31… 10,067.33 on January 29
• S&P500: 1,115.10 on December 31… 1,073.87 on January 29
• NASDAQ: 2,269.15 on December 31… 2,147.35 on January 29

Earlier this week came reports from Robert Prechter, the head of Elliott Wave, calling for this recent top to be the third peak of the long-term bear market.  He even said this is the last time you may get to sell stocks with the DJIA in quintuple-digits and he even went as far as to say that the lows of March 9, 2009 would likely be taken out.  Both Prechter and George Soros also called a bubble in Gold, and in that we’d be looking at the SPDR Gold Shares (NYSE: GLD) for weakness.

The good news is that we have a hard time getting all the way back to last March 9, 2009 lows even in a double-dip recession in most scenarios.  A rapid dry-up of business combined with an even more harsh stance from the administration can change anything, but what was seen in the first 70 days of March 2009 should under most scenarios be something that was very unique.  Turning the banks into utilities will not be good for the financial markets.

While we don’t subscribe to last year’s lows from March 9 being taken out in the near-term, it is obvious that the chances of a double-dip recession have increased considerably in the last week.

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JON C. OGG
JANUARY 29, 2010

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