Mid-week market update: The bulls are nervously getting ready for a party. Jeff Hirsch of Almanac Trader pointed out that two of his January indicators are positive. When all three are positive, the rest of the year tends to lean bullish.
This year, the market has eked out a 0.8% gain for its Santa Claus rally. The returns in the first five days has been positive. The only indicator left is a positive return for the month of January.
Will the bulls succeed? Here are the challenges they face.
An extended advance
From a technical perspective, the S&P 500 is nearing resistance while exhibiting overbought readings. It’s already broken out through resistance at about 3950, with secondary and strong resistance at the falling trend line at about 4000.
In addition, the market is overbought according to the NYSE McClellan Oscillator (NYMO) and the NASDAQ McClellan Oscillator (NAMO). While overbought markets can become more overbought, the odds favor a pullback from here.
I issued a tactical sell signal on Monday morning based on the percentage of S&P 500 stocks above their 20 dma becoming overbought. The market weakened after I issued that warning and the indicator closed in neutral territory and negated the sell signal. This indicator rose back to an overbought condition today as the market advanced today. We have a bona fide tactical sell signal based on closing prices. Please note, however, that this sell signal is a “take profits on long positions” signal and it is emphatically not a short sale signal.
The CPI wildcard
BLS will report the December CPI tomorrow morning and the report has the potential to be the source of significant volatility. Market expectations call for monthly headline CPI to come in at 0.0% and core CPI at 0.3%.
By contrast, the Cleveland Fed’s inflation nowcast
is showing headline at 0.12% and core at 0.48%. To be sure, the current environment of inflation deceleration has seen inflation readings undershoot the inflation nowcast, but do you want to keep playing those odds?
Earnings seasons ahead
As well, earnings season will begin in earnest when the banks start to report their results this Friday. Marketwatch
reported a warning from Michael Darda, chief economist and market strategist at MKM Partners of an ominous divergence between S&P 500 operating profits and NIPA profits, as calculated by the government.
“The record divergence between S&P 500 operating earnings and after-tax [National Income and Product Accounts] profits from the GDP accounts during the year 2000 was a critical harbinger for a broader earnings recession, corporate accounting shenanigans, and a nearly three-year bear market,” he notes. There also was a divergence, though less severe, before the 2007 to 2009 stock-market plunge.
That divergence is seen in this chart, which deserves a little explanation. To compare the two, he indexed S&P 500 operating earnings per share and corporate profit data, back to the end of 1993
In summary, the bullish hopes of Hirsch’s January Indicator are tempered by several major challenges. I would conclude that the most likely near-term bias of the market for the remainder of the month is down.