As January came to a close last Friday, I have to believe that many investors were disappointed. First, the S&P 500 lost 3.1% on the month for the worst monthly loss since last January. Secondly, there are some that believe that as January goes, so goes the year for the stock market. This is sometimes called the January barometer or the January Effect and from 1950 through the mid-80s, it was a rather reliable predictor. In the last 30 years or so, it has become less reliable as a predictor for the year.
Regardless of the reasoning, after seeing the market basically go up for two straight years and for the better part of six years, the start to 2015 has to be concerning. The fourth quarter GDP growth rate came in short of expectations at 2.6% and that is almost a 50% drop from the 5% growth rate recorded in the third quarter.
Earnings season hasn’t been too bad, but it hasn’t been great either. There are a higher percentage of companies beating their earnings and revenue expectations, but the earnings growth rate has been much worse than in recent quarters.
Looking at the year to date sector performance, the only two sectors in positive territory are the defensive sectors of utilities (+2.33%) and healthcare (+1.3%). The worst performing sector during the month of January was the financial sector with a loss of 6.96%. The sector has seen selling due to some weaker than expected earnings reports. The energy sector continues to struggle and lost 4.56% during the month.
Looking at the performance of the four main U.S. indices, I find it interesting that the worst performer is the Dow with a loss of 3.69% while the best performing index is the Nasdaq with a loss of 2.13%. What this says to me is that investors are selling the large-cap blue chip names and are hanging on to their growth stocks.
While the Russell 2000 is down just over 3.2% on the year and is the second worst performing index, that isn’t what bothers me. What is bothering me is the fact that the index has made three attempts to break above the 1,220 level, but it has been rejected there each time.
If you are finding a theme to my views, you are correct. I am very concerned about the market in 2015. There are too many indicators and too many analysis tools that are starting to look like they did before the bear market that started in 2000. The bull market over the last six years may be running out of steam.
I am not ready to stand on the desk and scream about the bear market being upon us, but I would recommend that investors exercise caution. Should we see a crossover of the 13-week moving average and the 52-week moving average on the S&P, I will become more cautious and likely switch my long-term posture to a bearish one. Right now there is a 90-point difference between the two moving averages, so we have a way to go before we have to worry about that happening.
