US Stock Market Analysis: Looking Towards January

I expect volume to remain below average until Jan 5. Many portfolio managers have closed the books and there is very little news scheduled for the next 7 days.

January should be interesting. There may be excitement heading into the inauguration. It would not surprise me to see some type of Obama rally.

On the other hand, fourth-quarter earnings are going to be lousy. Current forecasts show 276 S&P 500 (^GSPC) companies reporting a year-over-year decline in profits. Earnings for the S&P 500 will still be positive, however, with modest growth of 3.3%. Coal, drug, medical products and refining companies should report the strongest growth. Avoid steel and semiconductor companies.

The economic data won’t be positive either. December was another month of rising unemployment and most businesses have cut spending. Even non-profits are reducing their budgets. It is a tough environment.

I wish I could tell you that the economy will rebound in the second-half of 2009, but nobody knows. Once lenders start trusting borrowers, things should start to slowly improve. Until then, deflation remains a threat.

Focus List Updates

Uncertainty brings opportunity, and we’re continuing to look for attractive stocks. This past week, we added 2: AeroVironment (AVAV) and Enterprise Products Partners, L.P. (EPD).

AVAV produces unmanned aircraft systems, such as the Raven and the Wasp. The military has been increasingly reliant on such aircraft to provide intelligence. Therefore, we think the company should continue to do well under the Obama administration. Plus, earnings estimates have been revised upwards for both fiscal 2009 and fiscal 2010.

EPD operates a natural gas pipeline. Thanks to the market volatility and drop in oil prices, EPD has a yield of 10%. Though there is a timing risk, we like the pipeline companies for reasons that our oil analyst, Sheraz Mian, stated in a recent blog post.

The Markets

Stocks pulled back from overbought conditions, but volume was not impressive. Given my expectation for below average volume until the first full week of January, I would not pay much attention to market direction over the next 7 days.

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