Pullback in Order – Make Sure You’re a Buyer

Stocks leapt forward at the opening yesterday following gains in Europe and
better earnings here at home. The Stoxx Europe 600 Index rose 1.8% and
Germany's DAX gained 2.4%, while France's CAC 40 gained 2.7%. The gains in
Europe were attributed to rating agencies saying that the AAA ratings of France
and Germany will not be cut. At the close, the Dow Jones Industrial Average had
gained 69 points at 12,462, the S&P 500 rose 11 points to 1,292, and the Nasdaq
gained 26 points to close at 2,703. NYSE volume was 840 million shares, and the
Nasdaq traded 478 million shares. Advancers exceeded decliners on both exchanges
by about 3-to-1. Click to Enlarge Quality dividend-paying stocks have been
propelling the market since early December. Thus the Dow, with 30 quality
stocks, has been finding the going a lot easier than more speculative indices.
The breakout from the 12,300 line is not confirmed, setting up a new trading
range at 12,300 to the July high at 12,800. Even at these relatively lofty
levels the stochastic turned higher and issued another buy signal despite its
overbought condition. Click to Enlarge Like the Dow, the S&P 500 has confirmed
its break from the trading zone that had dominated trading since July. But the
S&P 500 lacks the gusto of its higher-quality cousin, and its breakout lagged
the Dow's confirmation by more than a week. The breakout sets up a new trading
zone at 1,285 to 1,348. Click to Enlarge The Nasdaq, with the most speculative
stocks, finally broke out with gusto yesterday, gapping through the bearish
resistance line that has plagued it since October. But it has yet to exceed the
October high at 2,753. Until it penetrates that high, the break to a new trading
zone will not be confirmed. Like the other indices, its stochastic is also
overbought. Conclusion: With all three of the major indices now in positive
territory, and two with confirmed changes in direction, the path ahead is up.
And so the phenomenon known as the "January Effect" has moved stocks forward
as new IRA and 401(k) money is invested. And additional purchases are the
results of investors who have sold stocks for tax reasons and institutions that
have sold for window-dressing reinvesting the funds in the new year. (If
you're looking for profitable option trades in the new year, you may want to
check out my colleague Joe Burns .) There is also the theory devised by Yale
Hirsch in 1972, which states, "As the S&P 500 goes in January, so goes the
year."