KEY
TAKEAWAYS
- January via March is the weakest three-month interval for shares in an election 12 months.
- The McClellan Oscillator turned bearish this week, suggesting no less than a short-term pullback for shares.
- The VIX stays low, however a push above 15 might point out additional draw back, retracing the positive factors from This autumn.
Okay, I actually tried to think about essentially the most bearish headline doable. To be clear, although, I am really nonetheless bullish on the long-term construction of this market. I’ve realized that when my Market Development Mannequin is bullish on the long-term and medium-term time frames, the first development remains to be constructive. And that is not a judgment name; that is a reality primarily based on the development as outlined by the weekly transferring averages.
However simply earlier than the vacations, I discovered myself much less and fewer capable of ignore the extraordinarily euphoric breadth readings, which are inclined to coincide with significant market tops. Not essentially “the world is ending” sort of tops, however undoubtedly the “I most likely need to wait to see how this performs out” type of tops.
2024 has so far began with a whimper for shares, with progress sectors giving again a few of the positive factors from December.
Ought to we be shocked by this preliminary downswing within the new 12 months? And what warning indicators ought to we be getting ready for to anticipate a deeper and extra sustained correction?
Seasonal Traits Counsel Weak point in Q1
The truth is that this preliminary weak point in January is definitely fairly frequent in an election 12 months. Jeff Hirsch, editor of the Inventory Dealer’s Almanac, addressed this seasonal sample lately on my present. And the seasonal charts on StockCharts inform the identical regarding story.
In case you have a look at the final 5 election years, you may discover that the primary quarter is definitely the weakest three-month interval. The S&P 500 is down a mean of about 1% in every of the primary three months of the 12 months, and every month has completed decrease in two out of the final 5 observations.
Your eyes may be drawn to the month of October, which is sort of all the time a down month with a mean return of -4.3%! However we’ll get to that later this 12 months. Going again to the present market, we discover an vital promote sign that was registered this week.
Key Brief-Time period Breadth Indicator Turned Bearish
The McClellan Oscillator appears to be like on the adjustments in advance-decline information to create a momentum indicator for breadth, type of an RSI for the market breadth. And this week’s worth deterioration pushed this indicator under the zero degree.
I’ve shaded the chart inexperienced when the McClellan Oscillator is above zero, and pink when the indicator has moved under zero. Notice the final development within the S&P 500 index (backside panel) throughout the green- and red-shaded areas, and you may see why this latest promote sign leaves me considering that additional draw back could also be in retailer.
So now we have now a weak seasonal sample primarily based on the typical election 12 months, in addition to the affirmation of breadth situations starting to show decrease. So what chart might assist us verify that this isn’t only a transient one-week pullback however one thing extra probably sinister?
Volatility Could Convey Affirmation
When markets transfer larger, you are inclined to see decrease volatility. It’s because traders normally do not utterly freak out after which purchase aggressively; they have a tendency to build up positions over time. However when issues flip decrease, panic takes management and we hit the promote button aggressively to try to assuage our fears. That is why volatility spikes in a down market, and that is why the VIX could also be a superb chart to comply with in January.
This week’s selloff noticed the VIX go from simply above 12 to simply above 14 in simply 5 buying and selling periods. We’re coming off the bottom ranges in years, because the rally off the October low was a basic slow-and-steady, low-volatility uptrend. So if and when the VIX pushes above 14 or 15, that might almost certainly verify that the seasonal tendencies for election years are enjoying out proper earlier than our eyes.
I really like following seasonal tendencies and different cycles, as they’ll present a “base case” for the markets primarily based on what normally occurs. However will 2024 comply with that standard seasonal sample? Additional drops in breadth indicators would validate that thesis, and a spike in volatility would counsel that risk-off could also be the best choice for traders in Q1.
RR#6,
Dave
P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.
The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any manner symbolize the views or opinions of another individual or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders decrease behavioral biases via technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor determination making in his weblog, The Conscious Investor.
David can also be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing threat via market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to determine funding alternatives and enrich relationships between advisors and purchasers.
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