The stock market suffered tremendous losses during 2008 recording its worst annual return in several decades. The major indices all were down significantly for the year:

Dow Jones Industrial Average - Down 33.84%
S&P 500 - Down 38.49%
Nasdaq Composite - Down 40.54%
Russell 2000 - Down 34.80%

The losses last year put the market as measured by the Dow Jones Industrial Average 23.66% below where it began the decade. The last time the Dow Jones Industrial Average declined during a decade was the 1930's, when it lost 39.64% over that ten year span. The Dow Jones Industrial Average would need to advance 31.00% in 2009 to avoid having a losing decade.

After huge drops in September, October and November the market found its footing in December and finished the month with little change. The strength the market began to exhibit in the last two weeks of the month was quite positive. Volume was light which wasn't surprising during the two holiday weeks making it hard to confirm the rally. Our short term direction signal turned positive on December 19 as did one of our indicators that is reported on in this newsletter. The indicator is the number of new lows indicator which dropped below 40 for four consecutive days turning the indicator positive on December 22.

The first trading day of 2009 was very positive. Even though the volume was light due to the holiday the day before, stocks enjoyed large gains with leadership coming from the technology sector. Energy, metals and material stocks also did well. The stock market remains in a bear market, but the advance from the November 21 low can continue for awhile. The major area of resistance is the November 10 high, which for the Dow Jones Industrial Average is 9159.58. November 10 also marked a high for the other major indices. Those highs have become resistance levels at 951.95 for the S&P 500, 1680.67 for the Nasdaq Composite and 515.19 for the Russell 2000.

This week will be the first complete week for 2009 and should provide us some information on the sustainability of the recent rally. The short term direction signal is higher, while the mid-term direction signal is lower. The long term direction signal has turned lower. This change was expected as it takes into account the downtrend for all of 2008.

Market Direction:
Short Term Direction (Days to Weeks) - Higher
Dow Jones Industrial Average - Higher as of 12/16/08, Prior signal was lower on 9/4/08
Russell 2000 - Higher as of 12/19/08, Prior signal was lower on 9/29/08
The Short Term direction is measured by the index being above (higher) or below (lower) the 50 day moving average of the respective index.

Mid-Term Direction (Weeks to Months) - Lower
Do w Jones Industrial Average - Lower as of 1/3/08, Prior signal was higher on 12/1/05
Russell 2000 - Lower as of 10/8/08, Prior signal was higher on 9/18/08
The Mid-Term direction is measured by the 50 day moving average of the index being above (higher) or below (lower) the 200 day moving average of the respective index.

Long Term Direction (Months to Years) - Lower
Dow Jones Industrial Average - Lower as of 1/2/09, Prior signal was higher on 7/7/04
Russell 2000 - Lower as of 10/24/08, Prior signal was higher on 5/5/04
The Long Term direction is measured by the 20 month moving average of the index being above (higher) or below (lower) the 30 month moving average of the respective index.

Of the three market direction signals the one that holds the most significance for us is the mid-term direction signal as it factors the time period which is most relevant for portfolio management. The other two signals are weighed into the portfolio management equation, but the short term direction signal can change signals frequently during minor moves and the long term direction signal is not frequent enough for proper portfolio management.

Moving Averages:
Dow Jones Industrial Average - 9034.69
50 day moving average - 8642.58 (down)
200 day moving average - 10,924.33 (down)
S&P 500 - 931.80
50 day moving average - 886.81 (down)
200 day moving average - 1182.72 (down)
Nasdaq Composite - 1632.21
50 day moving average - 1550.32 (down)
200 day moving average - 2111.12 (down)
Russell 2000 - 505.84
50 day moving average - 472.56 (down)
200 day moving average - 643.43 (down)
Direction of the moving average in parentheses. A change in direction is noted with asterisk.

Number of New Lows on the New York Stock Exchange for the past 13 Trading Days:
60, 49, 24, 22, 30, 32, 42, 33, 17, 31, 22, 6 and 2
Most recent data listed last.
Number of New Lows Exposure Indicator - Positive 12/22/08
One of our short term indicators that I have been updating in this report is the number of new lows on the New York Stock Exchange. Four consecutive days of 40 or more new lows is negative, while four consecutive days of 40 or less than 40 new lows would flip the indicator positive. New low data is from Investor's Business Daily.

Index Performance:
Dow Jones Industrial Average - 9034.69 up 519.14 or 6.10% for the week, up 2.94% for the year to date
S&P 500 - 931.80, up 59.00 or 6.76% for the week, up 3.16% for the year to date
Nasdaq Composite - 1632.21 up 101.97 or 6.66% for the week, up 3.50% for the year to date
Russell 2000 - 505.84, up 29.07 or 6.10% for the week, up 1.28% for the year to date

Economic Calendar:
January 5 - Monday
November Construction Spending (10:00): -1.2% expected, -1.2% prior

January 6 - Tuesday
November Factory Orders (10:00): -2.6% expected, -5.1% prior
ISM Services, December (10:00): 37.0 expected, 37.3 prior

January 8 - Thursday
1/03 Initial Jobless Claims (8:30): 550K expected, 492K prior
Consumer Credit, November (2:00): $0.5B expected, -$3.5B prior

January 9 - Friday
December Average Workweek (8:30): 33.5 expected, 33.5 prior
Hourly Earnings, December (8:30): 0.2% expected, 0.4% prior
Nonfarm Payrolls, December (8:30): -475K expected, -533K prior
Unemployment Rate, December (8:30): 7.0% expected, 6.7% prior
Wholesale Inventories, November (10:00): -0.9% expected, -1.1% prior

Earnings due out this week for companies we hold in client's portfolios:

No reports this week.

The number following the stock symbol is the consensus quarterly earnings estimate. These estimates are from Thomson Financial Network.

Investment Management:
Ten Largest Holdings - SPDR S&P 500 (SPY), iShares Russell 2000 (IWM), S&P Mid-Cap 400 Depository Receipts (MDY), iShares S&P 500 Value (IVE), I BM Corp. (IBM), Burlington Northern Santa Fe (BNI), Powershares QQQ Trust (QQQQ), Stericycle (SRCL), Abbott Laboratories (ABT) and Apple, Inc. (AAPL).

Five Largest Stock Holdings: IBM Corp. (IBM), Burlington Northern Santa Fe (BNI), Stericycle (SRCL), Abbott Laboratories (ABT) and Apple, Inc. (AAPL).

Five Largest ETF Holdings: SPDR S&P 500 (SPY), iShares Russell 2000 (IWM), S&P Mid-Cap 400 Depository Receipts (MDY), iShares S&P 500 Value (IVE) and Powershares QQQ Trust (QQQQ).

Sources: bizjournals.com, briefing.com, Marketwatch.com, TheStreet.com, Thomson Financial/First Call, Financial Times, Investor's Business Daily, Reuters, Yahoo.com, Dow Jones News and company web sites and releases.

Leonetti & Associates, LLC views and opinions are as of a certain date and subject to change without notice. The material contained herein has been obtained from sources and data we consider reliable, but we make no guarantee as to its accuracy or completeness. References to specific securities and industries/sectors should not be considered recommendations to buy or sell any security or investment product. Past performance is not a guarantee of future results.

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