MARKET RECORDS DOWN JANUARY
NO JANUARY EFFECT THIS YEAR
John J. Murphy
JANUARY BAROMETER... The fact that the market ended down for the January is a negative omen for the year -- or so goes the January Barometer. That barometer is based on the idea that "as January goes, so goes the year." We can think whatever we wish about such a simplistic idea. But the fact is the January Barometer track record has been impressive. The inventor of the Barometer is Yale Hirsch who publishes the Stock Trader's Almanac. Here's what he says in the Almanac: "Since 1937 the January Barometer has a perfect record predicting market direction in odd-numbered years. Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, or a flat market". Unfortunately, this is a an odd year. We're holding out hope for a flat year, which is the outlook we predicted at the start of the year. We don't mean to make too much of this one indicator. But anything with that kind of track record can't be ignored. The three major errors took place in 1966, 1968, and 1982. The first two may have been effected by the Vietnam war. All three mistakes, however, were in even years.


Chart 1

NO JANUARY EFFECT THIS YEAR... The January Effect calls for smallcap stocks to outperform large stocks at the start of the new year. That often continues well into the spring. The next chart shows the S&P 600 Small Cap Index from the start of last year. The green line along the bottom plots its relative strength against the S&P 500 Large Cap Index. The rising relative strength line at the start of last year (first green area) is what's supposed to happen -- as small caps outperform large caps. That effect can often last into the spring as it did last year. The January Effect often starts as early as November, which it seemed to be doing this year. {See second green area]. However, it disappeared during January. Chart 2 provides a closer at this year's action since October. Although small caps have been doing a little better during the second half of January, they underperformed for the entire month. [Since the January Effect didn't work this year, maybe the January Barometer won't either].


Chart 2


Chart 3

MONEY MANAGEMENT UPDATE... We invite you read through the January 31, 2003 MurphyMorris Decision Model Update. That can be viewed by clicking on the Money Management tab at the upper right of the MM home page. The update shows the status of some of the technical indicators that we use in making money management decisions. Chart 1 shows that the NYSE is still outperforming the Nasdaq market -- on a relative strength basis. NYSE dominance over the Nasdaq is usually associated with increased market volatility. That's also when most "bad" market events happen. The update also shows deterioration in a couple of our market breadth indicators. To quote from the update: "Overall, equity funds are not performing well, and we continue to recommend only a limited exposure...market risk remains high and any investments should have a stop-loss exit for protection. Balance safety with return and do not allow for large losses." That pretty much sums up our views here as well.


February 3, 2003

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com .

Editor's Note
StockChart.com has acqured MurphyMorris.com, and eventually Mr. Murphy's commentary will be rolled into StockCharts.com.