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January Effect Could Help Keep Bid in Stocks

Stocks started the new year with a bang and could continue to lift off Wednesday, as investors focus on the groups that got left behind in 2011.

New York Stock Exchange (NYSE)
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)

Traders are watching to see if the first five trading days of the month will be positive, indicating a possibly positive January as investors allocate funds to the market. Since 1945, whenever the market has been up in January, it has finished the year higher 88 percent of the time.

The S&P 500 finished up 1.6 percent at 1,277 Tuesday. The Dow was up 1.5 percent at 12,397, and the Nasdaq was up 1.7 percent at 2,648.

“The cycles indicate a choppy week... But If this is a breakout, the target should be 1,350,” on the S&P 500, said Art Cashin, director of floor operations at UBS. The volume started off strong but moderated during the day, he said. “But you want to give it more than one day.”

Cashin said the next level where the S&P will meet resistance is between 1,292 and 1,297.

Stocks gained, partly because of the new year “January effect,” but also because manufacturing data from China and around the world showed that December was a better month than November. U.S. ISM manufacturing data came in better than expected Tuesday and was at its best level since June.

The S&P materials sector, down nearly 12 percent in 2011, was the top performing sector Tuesday, gaining nearly 3 percent. The financials were up 2.8 percent, after an 18 percent 2011 loss. On the other end of the spectrum, utilities, up nearly 15 percent in 2011, fell 1.7 percent Tuesday as the worst performing of the major sectors.

“That’s the January effect. Classic bottom fishing. It just so happened to play into the ISM (manufacturing data) and construction spending… Instead of these numbers hurting the attempt at bottom fishing, they helped it so we were able to sustain the gains. You really need to sustain it with the Friday jobs report,” said Marc Pado, U.S. market strategist and technical analyst at Cantor Fitzgerald.

There is some data Wednesday, but traders are already anticipating the December jobs report, which they say could make or break the current rally. Economists forecast that 150,000 jobs were created in December, but already there is talk that the number could be higher.

”If we can hold above (S&P) 1200 to 1220, 1300 is what I would expect to see in the next week or two if we get a good jobs number,” Pado said, adding it would be a number to sell into.

Pado, like other analysts, said the market could become choppy in coming weeks as investors focus on Washington’s dealings with the tax cut extension, and the efforts in Europe to agree on solutions for the sovereign debt crisis.

What to Watch

Investors are monitoring the outcome of Tuesday’s Iowa caucuses where the Republican presidential candidates are vying for the lead. “It’s interesting to market participants, but so far not the market,” said one trader.

Pado said it will matter if there’s a major upset and a candidate drops out as a result. But otherwise, Iowa is seen as an early scene setter to traders.

On Wednesday, there is factory orders data at 10 a.m. and monthly auto sales, released by auto makers throughout the day.

Barclays senior U.S. economist Michael Gapen said he expects to see auto sales reflect an annualized selling rate of 13.7 million vehicles. That compares to a third quarter selling rate of about 12.4 million.

Gapen said the ISM sent a positive message about the economy. “It does suggest there’s momentum there. If you get good vehicle sales, and you get a good employment report for December, it suggests there’s moderate growth in store for the U.S.,” he said.

“When people say this recovery is fragile, we try to say that’s the wrong word. It’s durable. It’s not robust, but it is durable,” he said.

Follow Patti Domm on Twitter: @pattidomm

Disclaimer

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.