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WHAT THE MARKET WANTS: Feb. 2009

February 2, 2009 5:30 PM   Sadly, we paid dearly for our moments of happiness in December. The Grinch not only stole Christmas, but he stole the whole month of January as well. Every component of our style/cap index gave back all of its December gains and then equal amounts or more in January.

It's hard to believe that any style/cap that lost nearly 5% led the pack, but the Russell 1000 and Russell Midcap Growth each lost a little more than 4.5%. Nothing else was even close, unless you consider the Russell 2000 Growth losing more than 7.5% as something to be pleased about.

All of the major indices were down between 8 and 9%, except for the Nasdaq, which excelled by losing only 6%. All of the value style/caps lost double-digit numbers. The worst of the worst was the small-cap value which lost 14.4% -- and that is for the month, not the quarter or the year or the decade. For some reason, mid caps outperformed large caps, and both small caps and micro caps were just downright miserable.

For the past three months, large-cap growth was the "leader" by losing only 11%. Small-cap value has lost more than 20% in the past three months; micro-cap value, nearly 25%. It just doesn't get uglier than this.

For the trailing six months, virtually everything is down 30% or more, and for the trailing 12 months, everything is down 40% or more.

Clearly, December was a bear trap, one really nasty bear trap.

Dismal Reports.  As we noted in the previous issue of "What the Market Wants," January would be a key test, and it flunked. Public companies have indeed released, day after day after day, quite dismal earnings reports, for the most part. And to add its voice to the dirge, the government issued its share of dismal reports . . . on labor, gross domestic product, personal spending, and just every other economic indicator possible.

The dismal earnings reports weren't really that big a surprise, although the report from State Street Bank with its admission of conduit losses that had supposedly adequate reserves did surprise the market in a very negative way. In general, the forward guidance was muted, rather than outright negative, and in fact, a few companies such as IBM had reasonably positive comments looking forward.

Of course, earnings reports continue to be released at the time of this writing, and unless I am deluding myself, it seems that, as we go deeper in the quarter, the forward guidance has been a tad more positive.

Looking Ahead.  The new President is moving forward with his gigantic economic stimulus program, apparently with reasonable support from Congress. If Congress approves the bill by mid-month, there could be reason to forecast improved consumer confidence in the six-to-nine-month period ahead, which is typically about how far ahead the market looks.

We are currently testing the lows of the late November period. Whether or not those lows will hold depends on the progress of the economic stimulus bill, the continued earnings reports from public companies, and, hopefully, the absence of any new major negative surprises. Historically, the really bad news has been released early in the quarter, and we fervently hope that is the case this year.

It remains a dangerous market with many potential pitfalls, but also includes some of the best bargains from a value viewpoint that I have witnessed in my career. Careful, prudent shopping should be well rewarded in the quarters ahead.

Until next month,



David Brown
Chief Market Strategist

Next update:  First week in March.