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Volume 112

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There are two days left in January and those who study history will be very interested to see how these two days perform. Why? Well, in our latest Online Trader Series event, "The January Effect", we showed clearly the correlation between January stock market performance and that of the balance of the year. The top 25% of January's since 1950 on the S&P 500 have averaged 17.60% returns the BALANCE of the year. If January drops into the second quartile, the average returns the balance of the year also drops just beneath 10%. Of those in the top quartile, only 2 have produced balance of year returns beneath 10%. So, historically speaking, the odds of a much higher S&P 500 by year end are roughly 80-90%. We all understand that there are no guarantees, but this would be one indication of a strong bull market during the balance of 2012.

But it comes down to January performance. Through Friday's close, the S&P 500 was up 4.67% month-to-date. 4.00% is required to be part of the exclusive top quartile. Therefore, the S&P 500 doesn't have a lot of room for error on Monday and Tuesday. Tuesday is the 31st and will bring an end to what has been an outstanding month for the bulls on a number of different fronts.

Financials have been dominant during this six week rally, outperforming the S&P 500 nearly 2 to 1. We cannot overemphasize how important this is to sustaining a rally. The bank index rested this past week and, to be honest, this group deserved a break as they've been on FIRE off the December low. But we need to watch both price support at 42.00 and the rising 20 day EMA at 42.27. Banks came very close to testing that all-important 20 day EMA on Friday and the results were bullish as banks rallied throughout much of the afternoon Friday.

Separately, the Broker/Dealer index ($XBD) ran into resistance that we previously discussed near 97.00 and its falling 200 day SMA and the results were quite predictable. Sellers took over as you can see from this chart:

This chart was provided to our paid subscribers last Sunday night. We pointed out the key resistance zone, which you can see held back the bulls. Note the falling 200 day SMA coincided with reaction high price resistance at 97.00. It was time for a little profit taking and we've seen it. Now the onus shifts back to the bulls. Will they stand up and support this group on an eventual 20 day EMA test? The daily MACD couldn't look any better so the momentum is clearly favoring the bulls. Our expectation is that the group will rally off a 20 day test.

Another sign of further price appreciation was the ability last week for the market to overlook disappointing economic data. Advanced GDP for Q4 was 2.8%, below the consensus estimate of 3.2%. Initial jobless claims rose 21,000 from the prior week and were slightly higher than expected. There was bad news in housing as new home sales fell short for the month of December. Earlier in the week, pending home sales also came up short. Despite the somewhat poor economic news and the overbought and complacent conditions, bears could not wrestle control away from the bulls. The stock market is climbing the proverbial "wall of worry". Keep in mind that the market is MUCH more concerned about what it is anticipating in future weeks and months rather than what just occurred. The market behavior is telling us that there is a lot to look forward to in 2012. Until this behavior changes, we have to maintain a bullish bias.

Among the big earnings reports, what can we say about Apple (AAPL) that hasn't already been said? It was the blowout of all blowouts. With many companies struggling to simply match estimates, AAPL CRUSHED even the most optimistic. It's almost unfathomable the type of momentum AAPL has built not only in the U.S., but also globally where many countries are experiencing economic weakness much deeper than the U.S. It is truly the most amazing company of this generation and they've not missed a beat despite the death of its visionary Steven Jobs.