Stock Funds Make Solid Start To New Year With 4.66% Gain; Small growth soared 8.6% while large caps lagged; Oberweis is hot on China.(SERIES: MUTUAL FUND MONTHLY)(IBD SPECIAL REPORT)

Byline: KEN HOOVER

If the January barometer is any guide, 2006 is shaping up as a year of solid returns in mutual funds.

Invented by Yale Hirsch, author with son Jeff of the "Stock Trader's Almanac," the January barometer tells us that as goes January, so go the remaining 11 months. The Almanac's 2006 edition tells us that the barometer has been wrong only five times since 1950 and in some of those years external events skewed results. For example, January 2003 was down while the rest of the year was up. Hirsch attributes this aberration to jitters over the pending invasion of Iraq.

The market -- including fund investors -- had a terrific January 2006. For the month, the average diversified domestic fund was up 4.66%. Small-cap funds clobbered large-cap, and growth was a bit better than value. The best-performing style was small-cap growth, up 8.62%. Large growth limped in with a 2.97% gain.

For the month, the Dow Jones industrial average rose 1.37%. The S&P 500 was up 2.55%. The Nasdaq tacked on 4.56%. And the small-cap S&P 600 was the star for the month, going to an all-time high and closing for a gain of 8.33%.

January started off with nervousness over fears that short-term interest rates pushed up by the Federal Reserve might go higher than long-term rates, which have remained flat. An inverted yield curve has presaged an economic slowdown in months ahead.

Earnings reports from key companies started off poorly with disappointing numbers from Intel, Apple Computer, General Electric and Citigroup. But by the second half of the month, earnings from scores of smaller names were beating estimates. And the rally gathered steam.