In This Issue

Live from the S&P Trading Pit! Market Squawk Box

The January Defect?

Reports and Expiration Notices

January 4th, 2006 — Issue #308

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The January Defect?

Erik Gustafsson, TradeTheNews

The old adage states "as January goes, so goes the year." Historically speaking, if the first week of January and then the full month both show gains on the major equity indices, there has been a more than 90% chance that the indices will end higher for the year. Last January's poor performance correctly portended a lackluster year with the DJIA ending down 0.6%, though the fourth quarter rally managed to pull the Nasdaq and S&P500 into modest gains for the year (this compared to the strong double digit gains across European and the Japanese stock markets). So, this month's trading action will be of particular interest.

Despite the so-called "January effect," US equity markets were down about two percent in January of 2005, which has some traders concerned about the beginning of 2006. A busy earnings season, along with some key economic releases will set the tone for January, and possibly for the entire year.

Earnings season is back in January. With about two thirds of Dow Jones Industrial Average components reporting, these earnings will likely play a crucial role in whether or not the Dow can reach 11,000 early this year. Some of the other earnings reports that could be of interest include: Genentech, Amgen (the flag bearers for the biotech industry), Apple Computer (Apple will likely announce some new products at MacWorld this month and its earnings report will reveal just how well the iPod is selling), Ford Motor (expected to give details of its restructuring plan as well as its earnings release), and Guidant (watch for more developments in its merger saga). The earnings reports from the retail sector will also bear close scrutiny. Early sales data for December has been respectable, and may improve as the growing number gift cards are converted into merchandise. A slew of December same store sales figures out on January the 4th and 5th will flesh out the final tally for Christmas—either the expected success for retailers, or a surprising disappointment.

Energy prices could also be a concern in early 2006. A mild December kept energy prices contained, but as we enter the heart of the winter season, crude oil futures have moved back above $60 a barrel. OPEC will convene again in late January to discuss output levels. The organization has said publicly that it believes a price around $50 is reasonable, though some member states, notably Iran, are calling for a one million barrel per day cut in production. Such a move could send energy prices flying again.

January's other economic events will all be eclipsed by the January 31st FOMC meeting--the last to be headed by Chairman Alan Greenspan. Greenspan and Company will raise interest rates one more time before turning over the keys to the economy to incoming Chairman Bernanke. Amid the hubbub of the changing of the guard, speculation about Bernanke's strategy will likely hit a fever pitch. Uncertainty created by the departure of Greenspan and the abilities of the "new guy" could prompt market participants to stay cautious, at least until Bernanke establishes his leadership style.

So, is the fate of the whole new year riding on January? Perhaps not, but enough positive indicators could set the table for a bullish year. Should January's economic events, earnings, and sales numbers build a disappointing trend, however, it could send 2006 on a downward course.

Disclaimer: There is a risk of financial loss in futures and options trading. Futures trading is neither easy nor an easy way to make money. It takes hard work to have success. Please use sound money management when trading futures. Past performance is not necessarily indicative of future results. Nothing in this newsletter is intended to be a trading recommendation for you to buy or sell futures or options. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Readers are solely responsible for how they use the information in this newsletter.

Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!