Market Outlook
Stock market action so far this year has been weak and
mostly negative. This action has been fueled by plummeting oil prices, weakness
overseas, confusion about the Fed’s next move and it’s bellowing about low
inflation. Santa’s absence and a down January are bad omens, but they do not
guarantee unmitigated market catastrophe. Lower oil and energy prices,
while a drain on energy companies and the people they employ, it adds a lot of
money back in the pockets of consumers to put into the economy and the stock
market. Also, European quantitative easing funds are likely to find their way
into the U.S. stock market where prospective returns are greater.
The U.S. stock market ended a rough month this past Friday,
delivering its third loss in five days and extending its declines for the year.
The S&P 500 index dropped 3% in January, its worse monthly performance in a
year. While the U.S. economy continued showing signs of strength, energy
companies suffered from a sharp drop in oil prices and some big multinational
companies saw their earnings dinged by a stronger dollar. Investors also sifted
through the latest batch of corporate earnings news, and the results were
mixed.
As we
said recently “…Gold Mining stocks are
blasting off to start the year and Treasury Bonds continue to move higher as
they have since the beginning of last year. Equity indexes are barely breaking
even and how they end up at the end of January is considered a “barometer” of
how they will end the year…”
Investment Analysis
We recently commented “…Next
week’s performance is considered critical as a prognosticator of the market’s
expected 2015 performance. According to the Stock Trader’s Almanac January has
quite a legendary reputation on Wall Street as an influx of cash from yearend
bonuses and annual allocations typically propels stocks higher…January
Barometer simply states that as the S&P goes in January so goes the
year…The long-term record has been stupendous, an 89.1% accuracy…The market’s
position on January 31 will give us a good read on the year to come…No other
month can match January’s predictive prowess…”According to the Stock
Barometer the January Barometer indicator is negative again for the second year
in a row and 5 of the last 8 years. Since the start of the secular bear market
in 2000 January has been down 7 of the last 15 years with an average loss of
1.2% on the S&P and Dow and a fractional gain of 0.1% for NASDAQ. Five of
the indicators eight major errors have occurred in this 15-year timeframe as
mentioned above. All
of the major errors have occurred in secular bears, so if we still are in a
secular bear market, which we contend we are; perhaps we can find some solace
in this fact. We are continually reevaluating the efficacy of the January
Barometer as we do with all indicators, market cycles and seasonal patterns.
But it is way too early to relegate the January Barometer to the indicator
graveyard. Its 754 batting average is solid. Also of note, this is the
first time since 1950 our January Indicator Trifecta has registered a down
Santa Claus Rally, an up First Five Days and a down January Barometer.
The equity market is suffering under the weight of concerns
about global economic growth and mediocre fourth-quarter earnings reports. The
graph below is the 30-day return for the main 10 S&P equity sectors. You
can see virtually all the groups are down for the month with only Healthcare
and Utility sectors barely above water. Our index indicators are giving bearish
readings, which is more in line with the general market trend than the
occasional bullish readings such as we saw last week. As we suggested might
happen, the Dow has fallen into a bearish "lower highs, lower lows"
chart pattern. Our internal indicators have also fallen back into more bearish
modes, so options traders should continue to add bearish positions. Against the
current whipsaw action, it is best to take smaller positions than you normally
do, but don't sit out completely.
By Gregory Clay
Investment Strategist
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