And They’re Off

Daily State of the Markets 
Tuesday Morning – January 5, 2010  

Good morning. Stocks stormed higher out of the gate on the first trading day of the New Year, giving those who follow the old saw “as January goes, so goes the year” hope for another strong outing in 2010. The bold move to the upside, which recaptured Friday’s entire computer-driven dive and then some, was triggered by strong economic data out of China, the UK, and the U.S., as well as a return of the Bulls’ best friend – the dollar carry-trade.

Getting back to the predictive value of the first month of the year, investors usually watch January as a precursor for the remainder of the year. In recent years though, traders have begun to fret over the action of the first week as the saying “as the first five days go, so goes January” has grown increasingly popular. And then just yesterday, we stumbled upon some research which shows that a strong first day of the year is a good omen for the reminder of the week, month, and calendar year.

According to Schaeffer’s Investment Research, a gain of 1% or more on the first trading day of the year has been a good sign for the rest of the year. Since 1973, when the S&P has gained more than 1% in the first session, the market has ended the year higher 86% of the time – with the average gain on the year coming in at +14.7%.

Yesterday’s 1.5% advance on the Dow (which was the weakest performer in the group) was helped along in the early going on by economic data from overseas. China’s manufacturing industry posted the biggest expansion in five years as the PMI came in at 56.1 vs. 55.7.Then, the UK’s manufacturing sector rose to a 25-month high, while France’s PMI was also above expectations.

Speaking of the manufacturing sector, the good news kept coming as the ISM Manufacturing Index here in the U.S. recorded a fifth straight monthly increase in December. The Index, which is designed to call the outlook for the manufacturing sector in the U.S., came in with a reading of 55.9. This was not only above November’s reading of 53.6, but also the highest level since April 2006.

This brings us to the most important factor of the day: the action in the dollar. If you will recall, much of the reason behind the six-week period of market sloppiness seen in November and much of December was tied to worry that the dollar carry-trade was unwinding. Each and every time we saw an increase in the dollar, stocks were hit with selling. Thus, traders worried about what might happen in the New Year when traders returned to their desks.

The good news is that if the dollar-carry trades were indeed being unwound, then yesterday’s good economic news should have triggered buying in the dollar and the corresponding selling of stocks, commodities, and emerging markets. But instead, we saw the exact opposite. This leads us to believe December’s dollar rally may have been more about fund managers looking to lock in gains for the year by hedging their positions than anything else.

However, yesterday it was back to business as usual. Despite the solid economic news, the dollar was hit with selling and the rest of the carry-trade enjoyed strong buying across the board. So, while one day does not necessarily a trend (or a year) make, the action was encouraging.

Turning to this morning, we don’t have any economic data to review before the bell but we will get reports on Factory Orders and Pending Home Sales at 10:00 am eastern.

Running through the rest of the pre-game indicators, the overseas markets are mostly higher – more so in Asia than in Europe. Crude futures are down a smidge with the latest quote showing oil off by $0.10 to $81.41. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.79%, while the yield on the 3-month T-Bill is at 0.06%. Next, gold is moving up by $6.30 and the dollar is higher against the Yen and Pound, but lower versus the Euro. Finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a flat open. The Dow futures are currently off by about 3 points; the S&P’s are within a fraction of fair value, while the NASDAQ looks to be dead even with fair value at the moment.

Wall Street Research Summary

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