Thursday, January 31, 2008

January 2008 Rewind - All the King's Men

This January, equities logged their worst monthly start to the year since 1990. Indeed, the S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices posted losses of -6.12%, -4.63% and -11.68%, respectively.

Intraday, several major indices hit the official 20% correction mark, with many emerging markets doing substantively worse still.

Once again, the Federal Reserve came to put Humpty Dumpty back together again with a "surprise" 75 basis point reduction after a steep global sell-off during the Martin Luther King Holiday. In retrospect, that particular sell-off may have been precipitated by Societe Generale closing its leveraged “rogue trader” positions.

Nonetheless, on balance the month's economic news strongly reinforced the slowdown premise, even as commodities breached record levels (oil hit $100 per barrel and gold exceeded $900 per oz.). The Federal Reserve thus cut an additional 50 bps at their formal meeting, leaving the funds rate at 3%, its lowest level in several years.

In addition, the beltway joined in the attempt to revive the markets, with the Whitehouse and Congress agreeing to a $146B stimulus package.

Interestingly, Small-Cap and Value stocks strongly outperformed their Large-Cap and Growth brethren, indicating a rotation out of last year’s winners and into the laggards. Similar sector rotations were notable into Financials and out of Technology, as one example.

Downward volatility certainly reigned the day last month, and the bulls are no doubt happy to wish January a good riddance.

The Style Box below was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV).

The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

Sentiment: Negative
Volatility: Elevated (VIX 22-37)
Direction: Down

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