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The Honolulu Advertiser
Posted on: Sunday, January 4, 2009

Watch January for clues about '09

By Adam Shell
USA Today

NEW YORK — It's Wall Street's version of an early warning system.

We're talking about January, seasonally one of the best months for stocks. How stocks fare in the first month of the year could offer a clue as to whether the battered market will rebound in 2009, whether investors have regained their confidence and whether cash sitting safely on the sidelines is put back to work in stocks.

Historically, stock performance in the first five days of a new year, and January overall, has been a good predictor of how the full year will go. Since 1950, an up January has led to annual gains more than 90 percent of the time, the Stock Trader's Almanac says. But every down January has "preceded a new or extended bear market, or flat market."

So it's no surprise that with the stock market down 40.6 percent and on track for its worst year since 1931, investors will be scrutinizing stocks more closely than usual this January, says Kevin Lane, director of research at www.Fusioninvest.com.

"January has always been important for setting the tone for the year," says Lane. "A strong month would suggest that investors have come to the conclusion that the bailout plans and stimulus programs are working. A bad month would suggest they don't believe enough has been done."

It would be "disheartening" if stocks start 2009 like they did in January 2008, when the S&P 500 index slid 6.1 percent, says Paul Hickey of Bespoke Investment Group. "From a psychological standpoint, investors will start thinking, 'Uh oh, more of the same.' "

As it is, Wall Street expects the recession to end in mid-2009 and stocks to rebound.

Investors aren't particularly scared or aggressive now, and that could mean they could be easily swayed by how stocks perform early in the year, says Richard Bernstein, chief investment strategist at Merrill Lynch.

That's why stocks traded in the first five trading days of January are key. The last 36 times stocks rose at the start of the month, they were higher at year's end 31 times, the Almanac says.

"If the seasonally bullish pattern doesn't occur, it would be a red flag," says Almanac editor Jeffrey Hirsch.