Montreal, Canada

The January Barometer or January Effect might be a prelude to a bad year for stocks in 2010. Though certainly not a perfect forecasting tool, stocks historically have tended to rise or fall for the remainder of the year following January's total return outcome.

"As goes January so goes the rest of the year," as the saying goes. More often than not historically, stocks have typically fared well in years when the market posts a gain in January. Last year was an exception, however, as equities tanked 8.6% only to finish the year with a smart 26% total return, as defined by the S&P 500 Index. In 2008, January was a loser, down 6.1%, which accurately foretold the remainder of the year as stocks succumbed to the credit crash and collapsed 40%.

Prior to 2010, the last ten January's resulted in six losing starts compared to four winners. Of the six losing January's since 2000 only three resulted in negative returns for the calendar year; another three losing starts resulted in net gains. The 2000s were the worst decade in Wall Street history – worse than the 1930s.

The January Barometer had greater forecasting success in the 1990s when equities were in a bull market as stocks posted gains in seven January periods and finished the calendar year with big gains. The same was true for the 1980s as stocks posted seven winning January's followed by seven calendar year gains.

Global stock markets suffered their worst month of performance in January since February 2009. With the exception of fixed-income markets and pockets of strength in financial services, healthcare and biotech, January was a bruiser.

The MSCI World Index of mature economies sank 4.7% while the S&P 500 Index fell 3.6%. The MSCI EAFE Index, or Europe, Australia and the Far East, fell 5.1% last month. Unlike the MSCI World Index, which holds more than 50% of its benchmark assets in non-U.S. stocks, EAFE is totally invested in foreign currency-denominated equities.

Even the high-flying emerging markets succumbed to profit-taking as benchmarks everywhere plunged, triggered earlier last month by China's announcement to tighten credit conditions. In January, the MSCI Emerging Markets Index fell 7.8%.

Commodities, as measured by the Reuters-CRB Index, saw their steepest declines since last January, plummeting 6.3%. Crude oil prices dove 8%.

For stocks, only a few markets logged a gain in dollar terms.

With the U.S. dollar surging again to six-month highs against the EUR and most foreign currencies, foreign stock investors saw their returns stripped when converted back into dollars. This explains why MSCI EAFE fared worse than its global sister, the MSCI World Index. Also, big weightings in the MSCI Emerging Markets Index, like Brazil, saw its currency fall more than 8%. But for the most part emerging market currencies held firm last month compared to losses recorded throughout Europe vis-à-vis the dollar.

Among the major markets only Japan eked out a gain -- up 1%. In local currency terms, the Nikkei fell 3.3%.

The big safe-havens in January belonged to most credit indices, including investment grade corporate bonds (+1.8%), U.S. government securities (+1.7%) and mortgage-backed securities, like GNMA and FNMA (+1.4%). TIPS also posted a gain, rising 1.5%.

The usual suspects in a major market reversal also came back into play. The Japanese yen, despite government efforts to weaken the currency, gained 3% against the dollar. Also, reverse-indexing came back into vogue after touching 52-week lows earlier in December. Gold, which is usually a refuge amid market chaos and posted a gain in 2008, dropped a modest 1% in January.

One of the true standouts last month was Berkshire Hathaway after S&P announced its inclusion in the broader market benchmark. Berkshire gained 16.5% in January.

Alternative investments, however, were largely a disappointment last month. Though final numbers have yet to be digested, hedge funds probably fell in January. Managed futures, which tend to surge amid a break in the markets, fell more than 3%.

The good news for investors in January is that we saw a return to some pockets of strength even as stocks sold-off heavily towards the end of the month. The selling was not indiscriminate compared to 12 months earlier.

Financial services, healthcare, biotech, preferreds and retail stocks all posted gains. That's in stark contrast to 12 months ago when everything, except Treasury bonds and the yen, crashed. I was also encouraged to see most fixed-income markets outside of Treasury securities rise – including high quality corporate bonds. Last January corporate bonds sank as credit fears remained elevated.

My view all along is that this remains a big bear market rally off the March 2009 lows. I doubt we'll start crashing hard like we did from January 2008 until February 2009; but it looks like we've commenced a correction despite favorable economic news and mostly bullish corporate earnings. That's not a good sign and indicates the market, acting as a discount mechanism, has already priced-in a recovery.

I'm off to Zurich tomorrow. I'll report from Switzerland on Wednesday. Dugald will share his technical views on the market tomorrow.