January Effect?

As the markets kick off the first week of trading for 2005, we find ourselves in a similar position to that of January 2004 when the markets roared into the end of each year, raising investor sentiment to optimistically high readings.

In 2004, the markets were able to start the first week off really strong. But they soon tripped over themselves, shedding ground through all of January and much of February.

Should we expect the same in 2005?

From a look at current market sentiment we certainly should not rule it out.

From a sentiment perspective, the picture couldn't be more clearly similar to January 2004, which keeps us cautiously optimistic. As it stands right now, the level of optimistic sentiment that most concerns us comes from investor polls data.

As of last week, more than one major investor sentiment poll remained at cautiously high levels, indicating that the general investing public is a bit bubbly over the market.

Our experience tells us that it's usually a good time to be cautious about the market when the bullish camp grows to epic levels. This is due to the mechanics involved in investor sentiment and the lack of buying power when everyone is bullish.