The market s performance so far this year may be suggesting further weakness ahead.

The U.S. equity market action on Friday, July 16 due to weaker-than-expected results for many of the market bellwethers, combined with less-than-encouraging economic data may simply be a precursor of equity price performances for all of 2010. Michael Sheldon, the Chief Investment Strategist at RDM Financial, recently alerted me to an interesting market forecasting indicator. It s basically a twist on the As goes January So Goes the Year rule that states if the Dow Jones Industrial Average falls in price in January and through mid-year, it will likely be down for the entire year. Of course I had to see if this indicator was true, not only for the S&P 500, but also for the sectors within the S&P 500. I found that it was accurate for both, and, therefore, may carry ominous implications for the market and nine of its 10 sectors this year.
From 1900 through 2009, the S&P 500 declined in price 26 times in both January and in the first half of the year. During these 26 years, the market posted full-year declines 20 times, or 77% of the time, and recorded a median full-year drop of 11.7%. What s more, the market continued to fall during the second half in 14 years, or 54% of the time. In other words, should history repeat itself and there is no guarantee it will the S&P 500 has a three-in-four chance of posting a decline for all of 2010, and has a better than even chance of continuing its decline during the second half of the year.

So Go the Sectors, Too?

Taking this indicator one step further, I wondered how accurate it was since 1990 for the S&P 500 and its 10 sectors (which is as far back as sector data extend). I found the results to be eye-catching as well. First, there were five times that the S&P 500 declined in both January and through mid-year: 1992, 2000, 2002, 2005, and 2008. For the full year, the market was still down three times (2000, 2002, and 2008), or 60% of the time, and recorded a median full-year decline of 10.1%.
During this same 20-year period, all 10 sectors in the S&P 500 experienced declines in January and through June from as little as twice (for information technology) to as much as nine times (for utilities); consumer staples, financials, health care, and telecom services saw double downs seven times, while industrials participated in six observations. Once triggering this negative indicator, all sectors recorded median full-year declines from 1.9% (for energy) to 22.6% (for consumer discretionary), and recorded correct full-year forecasts from 50% of the time (for industrials, information technology, and materials) to 75% for energy, 86% for health care, and 100% for consumer discretionary.
Of course we all know that past performance is no guarantee of future results, but history does have a way of at least warning us to the possibility of further declines. And 2010 may be no exception. The S&P 500 declined in both January and through mid-year, as did nine of its sectors. The only one that history hints may close higher on the year is health care, which sounds logical if the S&P 500 is expected to remain in intensive care.
Sam Stovall

Chief Investment Strategist

23-Jul-2010 17:00:53 (15679447)   Copyright 2009 The McGraw-Hill Companies, Inc, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and their affiliates (collectively, "S&P"). Reproduction of this content in any form is prohibited except with the prior written permission of S&P.