Stocks Soar In January; How Should You Invest Now?


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The stock market rang in the New Year with gusto as many countries and sectors soared past their 2007 pre-financial crisis highs in January. Some investing strategists say their indicators signal the party is due for a break in February.

SPDR S&P 500 ( SPY ) climbed 5.4% in January, as of Thursday afternoon. The underlying S&P 500 index eclipsed the 1,500 level for the first time in five years, ending the month just 5 percentage points below its 2007 historic peak.

PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, rose 2.9%. Although it's trading below its 52-week high, it already soared past its 2007 apex in April 2011.

SPDR Dow Jones Industrial Average ( DIA ) surged 6.2%.

They currently have high IBD Accumulation/Distribution Ratings of B or B+ on an A-to-E scale, indicating institutional buying heavily outweighs selling.

"On the positive side of the ledger, housing and labor markets are far better off now than one year ago, fourth-quarter corporate earnings have also been mostly better than expected, Congress reached a deal to stave off massive tax increases and did manage to kick the debt ceiling/spending cut debate can down the road," the Stock Trader's Almanac stated in its "February 2013 Trading & Investing Strategy." "But on the negative side, housing and labor markets are still far from ideal, growth forecasts remain tepid, oil is heading back to $100 a barrel and Congress has only kicked the can, leaving major issues and concerns unresolved.

"Presently, the market appears focused only on the positives, while ignoring some of the negatives that could have significant and lasting effects on the U.S. economy," it added.

SPY and DIA are trading high above their 50- and 200-day moving averages , indicating a strong uptrend. But a handful of technical indicators signal that the stock market is overbought and due for a pause or consolidation before climbing higher, according to the Almanac. Since 1950, the stock market on average has been flat in February -- the weakest month among the best six months of the year (November to April) for the stock market.

"Barring any unforeseen events, we now expect the market to continue higher over the next two to four months and perhaps to marginally new all-time highs for the DJIA and S&P 500 and Nasdaq," the Almanac stated. "Then debt ceiling, spending cut and sequester politicking are likely to exacerbate bearish seasonal and cyclical forces, conspiring to knock this bull market down off its high horse. If a debacle is avoided in Washington and global economics remain resilient, then we may skirt Ursa Major for another year."

Health care, consumer discretionary, transports and consumer staples, all trading at new historic highs, lead the market's gains in the past month. Energy, basic materials, industrials, financials and commodities have yet to recover the prior highs.

Investors who pulled money out of stock funds in the past four years in favor of bonds are starting to dip back into stocks, data from the Investment Company Institute show.

"If investors continue this way, it could push billions of dollars of new assets into funds and stocks and help push equity markets higher as that money is put to use by fund managers," Jim Corridore, an equity analyst at S&P Capital IQ wrote in a client note. He recommends growth funds over value because growth tends to outperform value in the early stages of an economic recovery.

Small And Midcaps Tops

While the S&P 500 trades below its 2007 historic peak, the small-cap iShares Russell 2000ETF ( IWM ) and SPDR S&P MidCap 400ETF ( MDY ) have soared to new all-time peaks. IWM rallied 6% and MDY 7% in January.

In December, options traders were overwhelmingly bearish by four to one -- the most bearish they've been on small caps in a year, according to Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. As the index climbed, the bears in order to cover their positions had to buy back the stocks thereby boosting prices.

"Only 46% of small-cap stocks have a 'buy' rating on them, according to Zacks. This is well below other 'buy' ratings for larger stocks, hammering home yet again just how low the expectations are for small caps," Detrick wrote in an email. "This leaves plenty of room for some well-deserved upgrades."

In soaring to new highs the IWM and MDY have no overheard supply or price resistance.

Mark Arbeter, chief technical analyst at S&P Capital IQ, estimates MDY could rise nearly 20% over the next 12 to 18 months based on the size of the cup-with-handle chart pattern it formed at the end of 2012.

Over the past 10 years, IWM has returned an average annual 10.7% vs. 11.4% for MDY and 8.0% for SPY.

MDY sports an IBD Relative Strength Rating of 67, higher than those of IWM and SPY. That means its price performance has outdone two-thirds of the market the past 12 months. MDY's Acc/Dis Rating of B+ means institutions are heavily buying more shares than selling.

Foreign Markets

IShares MSCI EAFE Index ETF (EFA), tracking developed foreign markets, gained 4% in January.

IShares MSCI Emerging Markets Index ETF (EEM) shed 0.4%.

The two most popular foreign index funds also trade above their 50- and 200-day moving averages , confirming a strong uptrend. But they have a ways to go before reaching their 2007 peaks, presenting a potential "catch up" trade in which the laggards trade places with the leaders owing to bargain hunting.

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: DIA , IWM , MDY , QQQ , SPY

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