The bulls cross their fingers for January

Posted by Cam Hui -

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.

 

10 thoughts on “The bulls cross their fingers for January”

  1. In the pre-Presidential Election Year, from Jan. 1 to end of July, the American market has been up 100% of the time back to WWII.

    Portfolio managers take risks early in the new year because they have time to recover if they stumble.

    Junk spreads are just this week hitting new lows, a key sign of a bull market. European and Chinese junk did this a while ago.

    December 2024 Fed Funds Futures have plunged half a percent since the beginning of the year, less than two weeks ago. I trust professionals trading these over the Fed Governors who have been terrible forecasters.

    Copper, the PhD of commodities is hitting highs.

    Value and Small Cap factor indexes just yesterday started to outperform Low Volatility on a 90 day percentage basis – a Tactical Factor sign of a new bull market. The US is finally joining China and Europe in the new global bull market. Being US centric is giving Americans a distorted negative view of global investment markets.

    All of this says a new bull market has been born. Cam is trading short-term swings which is not my focus. I just want to say the surprises will be on the upside this year in my opinion.

    Let me also share some of my momentum research. Momentum trends persist because once a new trend starts it is always easy to sell a winning trade for a profit while difficult to buy at new highs. Therefor it takes a long time to reach a future peak. Case in point, it’s hard to buy Europe and China since they are up. But their PEs are cheap and their economies are set for upside surprises.

    If we get a bad inflation number tomorrow and US markets fall, I would suggest watching for markets to recover and hit new short-term highs to signal the bull market is on. This would lead to a FOMO surge. Just look at the S&P 500 chart. A new recent high would confirm a new higher low and a new higher high, a bull market chart pattern.

    1. Interesting! The ‘winter’ of investing is now transitioning to spring?
      Would any area exhibit better risk/reward characteristics?
      Thanks!

    2. Ken, excellent post. Thank you.

      Clearly, despite all the negativity, the market has no inclination to go down at least in the near-term. The indices have been very resilient to say the least.

      I primarily invest in small- and micro-caps based on my fundamental research. Some of the most beaten -down stocks (de-SPACs, growth tech names) that I follow have rising over the last few days of 2023, even on days the market overall is red. January effect? We’ll find out in coming days and weeks!

      In addition to copper, gold and silver are strong as well.

      On CPI:
      https://twitter.com/josh_wingrove/status/1613316638530469889
      “Biden will give a speech on inflation tomorrow at 10 am, per the White House.”
      Economists are expecting a report that shows generally lower inflation, per @theterminal. Which means they expect it’s something Biden will want to talk about.

      The market was strong today. Someone smells a cold CPI tomorrow. Let’s see how the market reacts to it.

    3. Ken and I agree that the opportunities are better outside the US.

      I believe that while non-US markets are cheap and showing signs of a turnaround, the S&P 500 is expensive on a P/E basis headed into a challenging earnings season. I have been pounding the table on Europe for several months.

      Ken is focused on China and Europe as long opportunities.

  2. ‘Please note, however, that this sell signal is a “take profits on long positions” signal and it is emphatically a short sale signal.’
    Did you mean to say ‘it is emphatically NOT a short sale signal’?

  4. From esteemed Mr. Deemer:

    The stock market generated Breakaway Momentum today for the 25th time since 1945: https://walterdeemer.com/bam.htm
    This is a genuine breadth thrust. It means (IMHO) we’re in a bull market.
    How long it lasts, and how far it carries, is something we will know only in the fullness of time.

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