These 5 Stocks Are on Fire

The beginning of 2010 has brought big gains for many stocks. Yet simply jumping into the stocks that have risen the most over the first few trading sessions in January isn't necessarily the best way to find the most promising stocks for the entire year and beyond.

Over the first six sessions of 2010, the stock market has been on a tear. The S&P 500 has risen all six days and is up almost 3%. It seems that the rally that began last March could continue for some time longer, especially if the balancing act between a recovering economy and the potential for higher interest rates in the future remains in its current holding pattern.

But 3% is just the tip of the iceberg for some stocks. Take a look at just how well a number of stocks have done since the end of 2009:

Source: Yahoo! Finance. As of Jan. 11.

There's a variety of reasons why these stocks have done particularly well. Ford, for instance, has recovered strongly from the recession. As the only surviving member of the Big Three not to receive government support, it alone has seen strong sales results during the last part of 2009. Las Vegas Sands continues a strong rally from last year, while CIT Group recently emerged from bankruptcy. McMoRan announced a big oil find yesterday, and K-Tron is getting bought out by Hillenbrand.

So have 2010's early buyers successfully identified tomorrow's monster stocks? Or is the stock market being set up for a big fall?

Jumping January
Many people see this month's early results as a positive sign for the year as a whole. The much-heralded January effect indicator suggests that because of the market's positive performance in its first trading week, the market should post gains for the entire year.

Of course, no seasonal indicator is perfect. It correctly predicted the market's 2008 drop and its 2009 recovery, but gave false signals in 2005 and 2007.

More importantly, though, you can't necessarily count on big gains in certain stocks to continue. Last year, for example, a number of stocks rose significantly over the first five days of the year, only to fall short of the market's overall returns for 2010:

Source: Yahoo! Finance.

So even if you think the indicator does a reasonably good job of predicting movements for the market as a whole, you can't count on it to identify individual stocks that will definitely keep rising after a favorable first week of the new year.

Why it matters
There's definitely something to be said for the way a year begins. By setting the psychological tone for the year, the first trading week establishes a mind-set that many investors refer back to over and over again -- whether consciously or subconsciously. If enough people follow such signals, then they can often become self-fulfilling prophecies.

On the other hand, you can't expect the market to rely solely on such indicators. If a company's fundamentals don't support continuing gains, something like the January effect won't stop stocks from dropping dramatically. Even if the market behaves somewhat irrationally over the short run, a company eventually has to produce earnings and cash flow in order to satisfy investors.

It's nice to start off 2010 on the right foot. But don't let these first few up days for the market give you a false sense of security. It's still more important than ever to identify the stocks that have everything going for them, both from a fundamental angle as well as with intangibles like seasonal factors. The more factors you have supporting the stocks you own, the better your chances to see the sorts of gains many investors enjoyed last year.