January Barometer – Another Indicator to Debunk or Not

During the end of January to early February each year, there is an annual discussion regarding the January Barometer, another indicator which supposedly has a great track record of predicting the return for the calendar year. This indicator was created and made popular by Yale Hirsch, founder of the Stock Trader’s Almanac. Basically, it says that as January goes, so goes the calendar year.

Simple enough, right?

The Almanac claims a “success rate” in excess of 80% which seems pretty darn good, at least on the surface. The first problem is that their research includes the month that just concluded. In other words, you couldn’t act on the January Barometer until February 1 to stay invested the rest of the year, but Hirsch included the entire year in his calculations.

Adding on to that, he never calculated just February through December returns to see if there was really a predictive edge. Finally, to make the study worthwhile, you would have to compare it to any random year being up or down.

There are all kinds of ways to massage and the manipulate the data. I am going to start with some big picture summary stats courtesy of Ari Wald from Oppenheimer, one of my favorite weekly reads on the markets and an all around nice guy.

Since 1928, February through December has been up 71% of the time. That’s the random number to compare. The median gain has been +8.2%.

Since 1928, February through December has been up 78% of the time following a positive January. The median gain has been +8.6%.

Since 1928, February through December has been up 59% following a negative January. The median gain has been +2.4%.

Based on the numbers from Oppenheimer, the January Barometer certainly looks actionable after an up January. Now, let’s massage the data a little differently and more granularly thanks to some help from my long-time industry friend Tom McClellan of McClellan Oscillator and Market Report fame with some truly outside the box analysis.

Tom broke up the January Barometer into various periods to see if there was consistency. Here is what he found.

From 1928 to 1949, an up January led to the rest of the year being up 50% of the time.

From 1950 to 1969, an up January led to the rest of the year being up 80% of the time.

From 1970 to 2019, an up January led to the rest of the year being up 64% of the time.

From 2000 to 2019, an up January led to the rest of the year being up 55% of the time.

This suggests that the 1950s and 1960s were more of an outlier than the norm. Like the First 5 Days of January barometer, this barometer looks much better on the surface versus random than when you dive into the details. As with so many historical trends, the markets have arbitraged the edge away over time.

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Bulls Running. All Not Great. Dollar Surges w/ Silent Media

After stocks peaked a few weeks ago and the Coronavirus was blamed, I talked about a trading range setting in as one of my three scenarios. That scenario was the most middle of the road. With the S&P 500 and NASDAQ 100 scoring new highs, the most immediate negative scenario has been ruled out. We are left with whether stocks will pause and remain in the loose range or accelerate to the upside and run higher.

There is clearly an issue with the S&P 400 and Russell 2000 so all is not as well as it has been. Semis are no longer leading and powering higher. Banks and transports are struggling. Only discretionary is looking strong from my four key sectors. To boot, defensive sectors like REITs and staples quietly lead, something I would rather not see.

High yield bonds are getting close to new highs and the NYSE A/D Line is confirming the rally in stocks, so it would be hard for the bears to make meaningful headway. Perhaps, stocks will continue to rally, at least in the short-term, to create more meaningful concerns before a real pullback begins. It’s very hard to bet against the bulls until more cracks in the pavement appear.

Interesting to note that the dollar has gone straight up since mid-December, something the media has completely ignored. I always find it funny when stocks going down and the dollar rallies, the stories all “of course. that’s what happens”. However, when it doesn’t fit their narrative, all you can hear are crickets.

It’s definitely time for a full canaries in the coal mine issue and I will try to get on this today or tomorrow.

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I Didn’t See That Coming

While I was looking for the stock market to begin the bottoming process on Monday, I definitely did not think that stocks would literally rip to new highs in three days. That was a much less likely scenario and one that would bother me. To be exact here, the NASDAQ 100 is at new highs with the S&P 500 right there. The Dow, S&P 400 and Russell 2000 are not. We will see where they end up at week’s end.

As far as leadership goes, we need to see a better job. Right now, only discretionary is pulling its weight. I also want to see some of the defensive groups back off. Energy has been absolutely decimated this year and regardless of where it may bounce in the short-term, the sector does need time to repair the damage before it can begin a sustainable rally.

What may be taken as me being negative is buoyed by looking at high yield bonds and participation. The former is close to fresh highs and it’s very difficult to begin a serious decline with junk behaving well. The latter, measured by the NYSE A/D Line, is also acting strongly and should run to new highs soon.

Unless my short-term concerns are completely unfounded and stocks are set to explode higher, the case for a trading range still makes sense, at least to me.  While I remain positive on the stock market over the intermediate-term, it wouldn’t be the worst thing to see some sideways activity this month.

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Not Looking Like a Full-Fledged Correction

On the surface Friday looked like one of the those “puke” days when anything and everything go down. It was an ugly day, but I didn’t see evidence of investors in full panic mode nor selling at any price just to get out and relieve the pain. Friday looked like the makings of an internal or momentum low where selling and would be at its worst for this decline. Of course, one day later, it’s only a guess until there is more to view.

Except for the NASDAQ 100, all of the other major stock market indices got in gear to the downside and wiped out all of January’s return. Yes, January was a down month which will spark cries that 2020 will now be a down year based on the half-baked idea of the January Barometer. I will have more on that in a different post. Right now, the NASDAQ 100 is the lone “go to” index” which somewhat flies in the face of my forecast that 2020 will not be nearly as rewarding for tech investors as 2019 was. It’s a long year and like my thinking that energy will be a later in the year positive story, tech must take some time to cede its leadership position.

Looking at sector behavior, I see a number of sectors which are behaving better than the stock market and they are not just the defensive ones, REITs, staples and utilities. Software, internet, financials and discretionary are all hanging in, something you would not see if this decline was just getting going and accelerating to the downside.

High yield bonds have been hit, but so far, they are holding well above last Monday’s levels, another positive.You can see the chart below.

Stocks are looking higher at the open as The People’s Bank of China, a name that always makes me chuckle, is injecting more than $100 billion into their system as markets reopen after being shut down last week for the Coronavirus. Between that and the feeling that markets might start becoming a little less sensitive to the virus, we could be in the embryonic stages of a little bottom forming.

We still have the Iowa caucuses, a slew of earnings and the employment report this week so I would not bet on a quiet week. I think buying the dip will be rewarded.

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Trading Range Being Established

As I have been discussing, the stock was longing for a reason to decline and it seems to have found it in Coronavirus. Whether it was that or something else, stocks were much in need of a pullback. As you know, sentiment had reached the frothiest of frothy levels, but the foundation remained solid. That usually leads to your garden variety short, sharp pullback, to at least get sentiment back to neutral. I don’t think we have the set up to see a decline that leads to despair and despondency just yet.

Again, I would be surprised to see just bottom last Monday and rocket to new highs. That would be a much more dangerous set up. I think the likely case is that some type of trading range is being established, bound by the 2020 highs and lows or perhaps a few percent below that. The bull market remain intact so we don’t need to start that discussion just yet.

The Dow Industrials, S&P 500 and NASDAQ 100 look to have the best foundations here with the S&P 400 and Russell 2000 weaker.A breach of Monday’s low seems like the next stop on the downside and that will be the first test for the bulls. If that doesn’t hold on a closing basis, stocks will likely fall another few percent to the 5% pullback mark.

My favorite group of 2019, semis, has been hit with the ugly stick over the past week. Semis also just ended their most favorable time of the year. I think their day in the sun has ended for now. Banks and transports are trying to hang in. Discretionary is the strongest of the four key sectors. The defensive sectors, REITs, utilities and staples are certainly the strongest sectors in the market right now.

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Media Day, Fed, Coronavirus & More Today

I am excited to join Yahoo Finance’s On The Move from 10:20am to 10:30am discussing the Coronavirus’ impact on the markets and if the worst is behind the markets.

After that, the TD Ameritrade Network is next to give a market update and offer some stock picks. I have to admit; it’s been tough to find fresh ideas after such a strong rally since October. I keep waiting and waiting for the traditional energy names to set up, but that’s not happening just yet.

Finally, I am looking forward to joining my old friend, Charles Payne, on Fox Business’ Making Money from 2:00pm to 2:30pm discussing one of the more boring Fed meetings in years. I am sure we will spice it up with some politics and where stocks are headed.

Turning to the markets, on January 17th, I sent this piece around about how investor behavior is now very dangerous. It’s definitely worth a read or two. So far, that was right at the all-time high. However, that peak should only be a temporary one as the bull market remains alive and reasonably well.

A few things I want to reiterate. First, between the extreme greedy nature of investors and the almost parabolic rise in the market since October, stocks are vulnerable. Similar set ups were seen in January 2018, January 2017, May 2011 and Q1 2000. There were others as well, but I think you get the idea.

The major difference between the other times and now is that the stock market’s foundation is much more solid today than any of the other times. That’s important to note as sideline cash is more apt to buy more shallow dips like we saw on Monday.

However, the only way to cure all this giddiness and greed is with at least a short, sharp pullback. Trading ranges rarely create enough of a scare. Over the next few months, stocks could take two paths to repair sentiment. First, the bounce since Monday’s low could peter out sooner than later with another leg down in February to clean everything up. Or, stocks could be entering a multi-week or month trading range that ultimately breaks to the downside later in Q1.

I would be a little surprised if stocks saw the final bottom on Monday and immediately surged to new highs and beyond. That would be the most dangerous set up and likely lead to more significant selling later in Q1 and perhaps Q2.

We also have the conclusion of the Fed’s two-day meeting at 2:00pm today. This is one meeting no one is talking about and rightfully so. The FOMC will stand pat for the foreseeable future. About the only thing people will focus on is any comment on the Repo crisis and the Fed’s support to the tune of several hundred billion dollars.

The market model on Fed statement day calls for plus or minus .50% until 2:00pm and then a rally. This is among the better set ups since Powell assumed the chairmanship although the stock market has not done well under Powell on statement day.

A full Canaries in the Coalmine is on tap for next week.

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The Excuse to Go Down

Last Friday, after what seemed like Coronavirus avoidance, stocks reversed sharply to the downside. Been there before. Got a tee shirt. One day patterns look amazing on a chart when they work, but foolish when they don’t. Today, it looks like we will see a nasty down opening which most are blaming on the spread of the virus over the weekend although some have wrongly opined that this is all about Bernie Sanders’ rise in Iowa. That’s just nonsense. Markets don’t care about the election right now. If Bernie was really surging, you would definitely see healthcare become one of weakest sectors.

Anyway, as I written about and mentioned in the media, very strong trends that grind and creep higher day after day after day typically do not end by going sideways. While they last longer than most people think, they usually end by a short, sharp decline that wipes out days and weeks worth of returns. That serves to punish those who jumped on the bandwagon very late in the game.

For many weeks, I have been discussing what has become among the most greedy sentiment on record. That’s still the case, but even this small decline should begin the repair process. Last Friday, I wrote that “A short-term pullback is long overdue and everyone is looking for one. However, remember one of the market adages. When it comes, investors will either not buy the dip or it will be the dip that they finally shouldn’t buy. Right now, I am betting on the former.”

Let’s see the extent of the damage done today. Heading into 2020, so many people were looking for or hoping for a decline back to 3000 on the S&P 500. With the big January rally, that would now amount to a 10% correction. I don’t think that’s in the cards right here.

 

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Bulls Ignoring Corona et al

Good Friday Morning!

Sorry I have been AWOL this week. Between the holiday on Monday and being in Boston on Wednesday, my schedule has been jam packed. Amazingly, with full on impeachment and the Coronovirus, stocks did not even hiccup this week. And that’s still with an historic level of greedy sentiment that just keeps on getting more extreme. One thing is for sure and that’s something I have said forever; price is the final arbiter. That means that nothing is more important than price in the end, no matter how poor sentiment is or fundamentals or anything else. In other words, it doesn’t matter until it matter and then it will matter in a big way.

The major stock market indices haven’t changed. Every index except for the Russell 2000 is making all-time highs. And said Russell isn’t that far away, so it’s not a huge concern. On the sector side, semis and discretionary are making fresh highs. Transports remain constructive and I  believe all-time highs are coming. Banks look similar but a touch weaker. I am not that worried here.

High yield bonds are still behaving very well and they are usually among the first areas of concern to develop. While they have pulled back a bit, they recently hit new highs, confirming the strength seen everywhere else.

A short-term pullback is long overdue and everyone is looking for one. However, remember one of the market adages. When it comes, investors will either  not buy the dip or it will  be the dip that they finally shouldn’t buy. Right now, I am betting on the former.

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Investor Behavior is now Very Dangerous

It seems like every single day stocks up higher, pullback and then rally into the close. It’s been one of those truly historic runs since December 3 where you would be hard-pressed to find any weakness. Those heavily invested are just sitting back, enjoying the gains and smiling. Those on the outside looking in are very frustrated and anxious to buy any discernible pullback at all.

While we mark all of our strategies on a daily basis, I rarely give any analysis until month-end. In these rare melt up markets, I find myself becoming a little giddy and looking at performance more. Although I know fully well that you can’t extrapolate a few weeks into a quarter or year, I find people often do and that usually comes right near a peak.

This kind of momentum is rare and typically keeps on going farther than people believe. Often without warning, they clean out the bulls in one, quick, fell swoop. Sometimes, that resets the bull while other times, it warns of a complete change in market character. Without doing any research at all, I remember late 2006 and early 2007 like this. Stocks just creeping higher and higher and higher. It went on for months, until it abruptly ended. The first pullback wiped out several months of gains. Volatility started in February 2007 and last more than two years.

I have already stated a number of times since mid-November that investors have become bullish, giddy and even greedy. This has been the most hated and disavowed bull market in history and I have often wondered if investors would even engage and accept it. And if so, what it would take.

So many people sold stocks and bought bonds or went to cash after the 2016 election. Their emotions and hatred for the incoming president got the best of them. They said they would not invest again under Trump was out of office. Whether or not that happens with the Senate’s impeachment trial remains to be seen, but over the past four weeks, I have heard from a handful of people who want back in. All of a sudden, they feel like stocks are going higher and don’t want to miss out. It’s that kind of behavior, “get me in at any price”, that causes me to worry and lose sleep.

13 months ago, the behavior was the exact opposite. Investors were screaming “get me out at any price”. 2019 was definitely a great year for the bulls and it seems that one by one, the bears are finally capitulating, throwing in the towel in disbelief. I am going to pick on high profile Morgan Stanley strategist, Mike Wilson although he is definitely not alone.

To his credit, Mike was negative on stocks during Q4 of 2018. He got that right to a big degree. However, after the initial bounce early in 2019, Wilson took his negativity a step further and pounded the table on a decline to 250 in the S&P 500. As stock moved steadily higher, 2500 became 2700. Interestingly, his TV appearances dwindled away, whether by the network or by Morgan Stanley. Finally, as 2019 was ending, Morgan Stanley put out a note from Wilson that now 3000 was the downside and things were no longer as bad as he feared. I haven’t seen Mike in any interviews for some time.

The great John Templeton once said that “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Whether you mark the start of this bull run in March 2009 or December 2018, it’s very hard to argue that we are not seeing euphoric conditions right now. However, let’s remember that markets can stay irrational a whole lot longer than anyone can stay solvent as Keynes once said.

10,000 Dow points ago, I first called for Dow 30,000 before all was said and done. I wrote it here. I said in on CNBC, Fox Business and Yahoo Finance. Most people either laughed or nodded their head as they dismissed it as nonsense. In the throes of collapse 13 months, I pounded the table that new highs would be seen in 2019 and Dow 30K would closely follow. Most of my industry friends and colleagues were convinced a new bear market had started. Today, the masses are all talking 30,000.

The stock market usually builds towards a peak. There are almost almost warning signs, sometimes for months on end and in the case of the Dotcom Bubble, it took well over a year of warnings. Over the coming few weeks, I will publish a fresh Canaries in the Coal Mine which has rarely missed a major peak in stocks.

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That Was Quick

On Monday I wrote about a low risk opportunity for the bears with very well defined risk. Market sentiment had reached an historic extreme as investors had become beyond bullish and giddy. They are downright greedy. Market greed isn’t corrected quickly nor painlessly. It normally takes a sharp decline in stocks to create some fear and panic that things have changed. The problem with playing this is that markets can stay irrational longer than you can stay solvent.

With that said, we wait for something in price to indicate that the bears have an opportunity. Last Friday, stocks opened at their highs for the day and closed near the lows. That represented a one day pattern called a “key reversal”. While one day patterns do not possess significant strength, they do give a very close point where you know you are wrong. In this case, closing above Friday’s high was that point.

It didn’t take long, but the trade was wrong immediately, meaning on the close one day later. Cut your losses, lick your little wound and move on. The historic level of greed hasn’t changed. Risk remains. That could go one for days, weeks or even months. We sit tight and wait for another set up or perhaps stocks decline without a good risk/reward opportunity. In any case, it’s hard to throw more money into stocks right here or increase risk.

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