The January Defect

The January Effect is a historical phenomenon along the mystical lines of the Santa Claus Rally. At the end of the year, investors will often sell off losing positions to take a capital loss (good thing to do to offset capital gains), then buy back that position after the new year causing a January rally. So far this year, although we’re only two trading days in, no strong buying has hit the market…Santa’s non-rally is causing a New Year’s hang over.

What we’ve been seeing in the New Year is a rash of profit taking spilling over from the last couple of weeks. Despite great sales news and a positive economic outlook for 2005, stocks are hardly impressed.

As of this writing, 2:45 pm on Tuesday, stocks are slumping. The Dow has tumbled 117 points, the NASDAQ is down a whopping 50 point and the S&P 500 has slipped 16. So far on the year, the Dow is down 170 points, the NASDAQ is down 74 points and the S&P 500 is down 26 points.

All of the short term moving averages were busted in the past two days. Thankfully, conditions as of this writing are oversold. We should begin to see some buying enter the market for the rest of the week. But, if further selling occurs, we could see the major averages break below the December 9 th lows and head for the November 22 lows at Dow 10,380, NASDAQ 2,052 and S&P 500 1,167.

On the commodities front, oil gained $1.78 per barrel today and is currently trading at $43.90 (a strong catalyst for today’s sell off). Gold is showing some weakness trading down $1.30 at $427.90 after the dollar gained against the euro.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."