January 2006

[Note: What the Market Wants for this month is based on Sabrient's filter backtesting results for last month.]

December did not provide a very positive end of the year for the market, with all major indices down for the month. However, most of that decline was in the last week or so on relatively light volume, so too much emphasis should not be placed on the December numbers. In general, large cap stocks outperformed small-cap stocks and value outperformed growth. Nonetheless, growth has steadily led the value style for the past six months, and it is unlikely the December performance will impact that leadership.

The market ended the year with most of the same preferences it demonstrated during the previous six months -- a clear preference for growth, specifically, growth of earnings at a fair price (i.e., GARP). In addition, the market continues to favor earnings of good quality, that is, earnings accompanied by strong free cash flow and earnings growth that is consistent. In fact, over the past six months the market has to some extent begun to chase such stocks, so that price momentum was in favor as well (which explains the drop in performance results for value stocks).

In summary, we ended 2005 with a noticeable diminution of the several-year preference for value attributes, and we head into the New Year with what appears to be a moderately strong, growth-oriented market that favors consistent, high quality earnings.

The market behavior will be reviewed again the second week of February 2006.