January Moves
by Trace Jonnson
05-JAN-04

2003 delivered a very strong year for equities in spite of the many headwinds the market faced. The NASDAQ produced an eye-popping 44% return, while the returns on the Dow and the S&P were each north of 20%. After several years of hoping, the economy came through with the “second half recovery” as the GDP zoomed in the third quarter. Now that all the corks are popped, and the calendars are turned, the Experts are focusing on what they hope to be their most profitable stock picks for 2004 based on the trends they see in the making.

Dow Theory Optimism

In the 4th quarter, the three major indices returned a very similar 8.85% on the S&P, 9.92% on the Dow and 9.42% on the NASDAQ. The more telling statistics, for some Experts, are the relative performances of the indices in December. The NASDAQ was up a modest 0.85%, while the Dow and the S&P appreciated 5.15% and 3.58%, respectively. Richard Moroney, editor of Dow Theory Forecasts , reads a recent Transport confirmation of an Industrial high.

Jack Schannep, editor of Schannep’s Timing Indicator and theDowTheory feels the market is in the midst of a move to 10,635, which he feels is the crucial level for confirmation of a “secular bull market.” The market was at 9,380 when he made that call on September 30th, at the close of the 3rd quarter. Manufacturing data confirmed his economic outlook and the exciting growth making its way through that channel is evidenced in the out performance of the Dow relative to the S&P. The Dow still has another 12% move, on top of the 12% move it just made, to reach all time highs of 11,722.

Moroney feels good about the market’s trajectory, though he does recommend a 5-10% cash position. There is a bit too much optimism, he feels, as measured by the 88% of issues traded on the New York Stock Exchange, which are above their 200-day moving averages. Schannep, who times the market with the S&P and Dow tracking stocks, expects some consolidation around the 10,635 before making a run at All-Time highs.

Schannep’s historical data extends to the beginning of the 20th century. He feels that the excesses of 1999 and 2000 that capped a 10-year bull run were excess, and expected a bear market prior to 2000. In such a world, the Dow would still be sitting below 10,000. Should the Dow now eclipse its historical highs, the bull would be confirmed for all of the timing indicators he monitors. Schannep’s New Year letter does conclude with a brief comment that “Further rises in 2005 could be a problem,” indicating a cyclical bear market could rear its head in a year of negative returns. Nevertheless, for now, he remains 100% invested.

Blue Chips for the Long-Term

Moroney currently has 51 stocks on his long-term Buy List, which are stocks he thinks should deliver superior growth. He feels investors should own at least that many to have a truly diversified portfolio.

January Effect?

Dennis Slothower, editor of Stealth Stocks is looking to January as a critical barometer for how 2004 will go. If the market is strong in the first several trading days, institutions are putting more money to work. Slothower is nervous for a couple of reasons. The Fed has cut the money supply fairly steadily for the last couple of months. Further, he feels the rotation toward blue chips is evidence that institutions don’t prefer to increase their risk exposure in the market, which he feels portends trouble ahead. Slothower has moved a good portion of his portfolios into money market accounts, with an average cash allocation of 58%. The lowest allocation is in his income portfolio, with 30%, but that is because the assets in the portfolio have higher yields than money market accounts.

So Goes the Year?

January may be a barometer month that is indicative of performance to come throughout the New Year. Nevertheless, the cycles that the market moves in are longer than a one-month period. Time horizons become very important at times like these. Schannep is looking at the next twelve months, guided by the last 105 years. Richard Moroney plans for the next 6 to 48 months with each of his stock picks, but like Dennis Slothower and Jack Schannep pays close attention to short-term fluctuations and timing opportunities. The Experts can help you match the right securities to the right time horizons to maximize your profit opportunities.

Trace Johnson is an analyst and writer for Zacks.com and the Zacks Advisor. He has appeared dozens of times on WebFN and CNBC-Europe. He can be reached at tjohnson@zacks.com.
 

* * Reprinted with the permission of  Zacks * *