3 Early Themes for 2010

Relying on quick decisions for important matters can have disastrous effects. Without being tainted by deep, ingrained biases, initial reactions can offer interesting insights. However, these first few thoughts rarely are the framework of successful decision making.

In most areas of life the adherence to a thoughtful approach is necessary, and in the financial markets it is paramount. New information, shifting prices, and a seeming need to create as much confusion as possible lends the markets to be an environment where process trumps gut reactions.

Recognizing the need for process over quick reactions, there are three important themes developing in 2010 that must be watched. As the year is only one week old, plenty of time remains for markets to dismiss my observations, but these three themes are worth watching:

•1.       Past is prelude - 2009 was characterized by a sharp rally from the March lows where every decline was shallow and the rallying prices never seemed to stop. Looking at individual stocks and asset classes, those that had been performing the worst became the market leaders. Entering 2010, I was looking for a more rational market where value would trump momentum and markets would move moderately. Instead, the first week of 2010 have resembled the past. The S&P 500 has climbed 2.7% in 2010 with many markets hitting synchronized highs. For individual stocks, those that performed poorly last year have rallied sharply (Dryships is up 16% versus a 2009 loss of 45%) and the best performers are lagging (Baidu is down 1.7% following 2009's 215% rally). Those looking for something fresh in the New Year instead have seen a market that resembles the one we had in the prior year.

•2.       January barometer - A popular Wall Street theory is that the first five trading days of January can predict the stock market's performance for the remainder of the year (a similar theory uses the entire month of January). Since 1931, when the first five trading days are positive, the market has ended the year higher 73% of the time. Notwithstanding clear breaks in this pattern (2009 was lower over its first five trading days and the entire month of January, yet enjoyed large gains), those following this approach are encouraged by the S%P 500's 2.7% year-to-date gain.

•3.       Growth dominates- I still expect 2010 to be a stock-picker's market where value outperforms growth and income is the bedrock of a solid portfolio. Thus far I am wrong. Over the weekof the year, small cap stocks have outperformed large cap, and commodities have trumped all else. The market continues chasing the highest beta names and until that pattern ceases, my argument to favor income or growth is clearly wrong.

The year is still young, but these three themes continue to dominate. Looking toward earnings season over the coming weeks, opportunities will present themselves that could change the nature of the market. However, until such time comes we are best served by recognizing the tone of the market and trading accordingly.