JANUARY DEFECT:

Even with Monday's big runup of 80 points at the open (reasons being the successful Iraq election -fundamental- and the last day of the month -quantitative- and the aforementioned bounce off the 10,400 Dow Support and 1163 SPX line), we still needed another 300 points today to finish with an UP January ( 40 more on the SPX 500). Still, although the January Barometer has a fairly good track record in up years, not all down Januarys result in a down year!
Sentiment Indicators are echoing the recent bottoming into sideways action (which could result in Accumulation or Redistribution) with so-so levels, except for a couple outliers: for some reason Mutual Fund Cash dropped a huge 10% from 5.5% to 5%, and the AAII survey's Bears again crossed up to 36% vs the Bulls 26%!. All others have fallen into normal range.

JANUARY AFTER-EFFECT:

With today's DJIA up 140 after a nasty 42% retracement of the year-end rally (the hedge funds finally took their profits and justified their management), there are hopeful signs that we bounced up off the 10,400 resistance-turned-support level from the 2004 Flag/Trading Range. Although there are no drastic swings in Sentiment readings, there are a few that indicate a cessation of downward momentum: the CBOE put/call hit a Bullish 70% last week; the McClellan Oscillator (ratio-adjusted) is at a relatively low -34; Investor's Intelligence Bears are at 24.7%, highest since the Oct.22 start of the above rally, as is the public shorting to Specialists' level of 2.28. Plenty of cash abounds with mutual fund cash at 5.5% and the Dow 30 dividend yield now up to 4.23% - tempting, with today's low money market rates and new taxation benefits. The AAII (those Fundamental Fellows) Bullish/Bearish ratio is dead even at 33.7% apiece, although it was nicely inverted to 40% Bears last week.

STATE OF THE MARKET:

As several of the Indicators come down off their extreme year-end complacent highs (e.g.,605 new highs vs. 35 new lows) - which Fundamental analysts would call year-end position squaring - one stands out immediately: IBD's mutual fund cash jumped up from a steady 5.2% to 5.5% going back to November, a significant Bullish change, coupled with corporate cash of $2T. It appears that the U.S. might be making another paradigm shift in the new millenium from Agrarian to Industrial to Technology now to Financial power as we outsource production to cheaper labor, cut down on capital expenditures in lieu of a softer domestic and global economy. So far since 2000 we have increased our foreign Treasury indebtedness from 30% to 40% and jeopardize that with a weaker dollar.
Another standout Indicator this week is the AAII survey Index which shows a Bullish crossover, with the Bears outnumbering the Bulls 40 to 34%. Hopefully these few Bullish factors will put an end to this January slide until more Indicators line up oversold and predict a positive 5th year.

THE JANUARY EFFECT:

Although many Sentiment Indicators are still near their complacency highs, many have retreated lower, such as the ISEE call/put ratio (160 down from a negative 213), the NAZ Volume vs. the NYSE (149 vs. 169), and the delayed Public/Specialist short ratio (1.59 down from 1.91). As today's market rallies we see hopeful signs in a low McClellan Oscillator of -57, in a bottoming range; and as Michael Santoli reports, and all-time high in the old Odd Lot shorting number, a dinosaur from the past which was superceded by options.
Hopefully this is a retest back down to the top the Trading Range, although the Volume does not confirm this yet. Also provoking caution is the Investors' Intelligence survey of 62.9 Bulls, 20.6 Bears.
Finally, looking back at the Dec.21 column mention of CEFs selling year-end to rise again in January, many are doing nicely and should continue on up - NVX, VCV, NCP, etc.

YEAR-END CONDITION:

Once again the Sentiment Indicators warned of an overbought condition in the markets - December's 3rd full week ended with several Indicators at complacent extremes; a few ameliorated during the final week (such as the 2 put/call ratios, the VIX, and a few less advances than declines), but some got even extended moreso: NYSE new highs vs. new lows; and the Nasdaq Volume vs. NYSE Volume, near a 12 month speculative high. The Public is shorting more than the Specialist at 1.91 to 1. After Monday's profit-taking only the fullness of time will reveal the extent of this correction.