INVESTING: Year off to a good start, but investors should be wary

There was talk in December that the market would fall apart in early January, just as it did last year.

The catalyst this year would be the hedge funds that pumped the market up using margin and other derivatives in order to get an up year so they could get their bonuses. As usual, the market didn’t listen to the talk.

Stocks came out of the gate strong and have been firing ever since. Because the first week was good, the talk now centers on the January barometer.

This is an old stock market saw that claims as goes January, so goes the year.

Any calendar indicator should never be

taken at face value, and this one deserves particular scrutiny.

There are five cases in the last 50 years where January ended up, but the year ended negative. The previous five all had one glaring coincidence with 2006. They were at or very close to the fouryear cycle low. The last major low in the stock market occurred in October 2002. Well, it’s almost four years later.

In January 2005, I claimed the year wouldn’t turn out so great. And all year long I highlighted the almost imperceptible yet consistently weakening nature of the market. And there you have it; the S&P 500 gained only 3 percent!

I also have been talking for some time

about 2006 being the first negative year

since 2002. And despite a good rally that has the potential to bring the Dow Jones industrial average within sight of its alltime high, I still think this year is going to hurt some people, with a pullback in the S&P 500 from a high of at least 12 percent. Odds are, however, that the correction goes full bear and the market falls at least 20 percent.

The most likely candidates for weakness are the micro- and small-cap stocks. These sectors gave up their relative strength leadership in October and have yet to regain it.

The internal condition of the small stocks is incredibly weak, and a sell-off in the general market can do a lot of damage to these stocks.

On the other hand, just as in the last bear market, there will be some strong sectors. Before Christmas, I said I would explore the pockets of strength in 2006. Utility stocks were the second-best-performing S&P sector in 2005.

There is a good track record of the second-best becoming the best finisher the following year. I think utility stocks will show significant outperformance this year.

And according to the number of analysts who have talked about Google this year, no self-respecting stock market prognosticator can hold his head up on Wall Street without giving a 2006 prediction for this stock. So, in hopes of keeping my open invitation to the Bull and Bear intact, here it goes: Google will close down for the year, though it may go higher before it begins to fall.