What the January S&P Barometer says about the stock markets this year.

The January Barometer states that as the S&P 500 goes in January, so does the rest of the year. This indicator has had only 5 significant errors in the past 58 years and has a 91.4% accuracy ratio over the same period!

The 5 times that this indicator was wrong coincided with some fairly major events.

1. In 2003, the anticipation of military action in Iraq

2. 2001 saw 2 interest rate cuts in January and of course September 11^th.

3. In 1982 we had the start of a major bull market

4. 1968 and 1966 were both affected by Vietnam

In January last year the S&P 500 was well down and we had a subsequent bear market, which we are still in. The current contract in the S&P 500 is the March contract and this opened the year at 902. It ended the month on Friday at 822, almost 9% lower for the month. This indicator suggests that the markets will also end 2009 down for the year as the bear market continues.

At the time of writing this, S&P 500 futures are further down at around 809. As I have written before, round numbers have a tendency to produce support, even it’s just from a psychological perspective, and therefore we may see some support at 800. This level is also quite visible on the chart as buyers have come in at around the 801 level several times recently.

If this level can be cleared then we may well see a move lower to around 750. Support should be seen at that level but we’ll have to review things if and when we get there.

As I have written many times before, everyone still seems focused on where they think the bottom of the market is and when they should buy. It’s quite amazing really that you rarely hear people say “the market is going down and I’m going to sell it short”. People seem to want to fight the tide instead of just go with it. This is of course why trend following works. You simply identify a trend in the markets and jump on board until the trend reverses.

As subscribers to my LS Trader financial spread betting system will know, we were short the stock markets for a big part of 2008 having first shorted the markets in January. We are again short some of the stock markets right now and will be for as long as the markets continue to trend lower. If you want to learn how to make money by shorting the stock markets you can subscribe to the LS Trader system here

There is an upward bias always in the stock markets as people buy in to the myth of buy and hold. This strategy is all well and good if you are in a multiyear bull market, but if you buy and hold through a multiyear bear market you will be in trouble. I believe this bear market has quite a way to run and I don’t see us having any buy signals in the stock markets in 2009.

All things considered it is unlikely that we will see much upside movement in stocks for the foreseeable future. There will most certainly be some bear market rallies along the way but I don’t see us having any buy indicators for stocks any time soon.

Good luck in your trading

Phil Seaton

PS. Click here to sign up for the LS Trader system. The system comes with a no quibble 60 day unconditional money back guarantee.