When the S&P500 Closes out January with a Loss

The Market Vane survey of commodity trading advisors has dipped below 50% for
the first time since 2003, meaning for the first time in over four years,
commodity trading advisors as a whole no longer expect higher equity prices
over the longer-term. This is one of the more reliable smart money surveys,
and while it’s long-term in nature and doesn’t tell us much about the
immediate market outlook, it noteworthy that this bullish setup is no longer
in effect. It won’t go back into effect until we see three consecutive weeks
of a reading back over 50% (see track record).

On the weekly commitments of traders front, combined commercials in Nasdaq
futures are holding on to their net long position and large traders in e-mini
S&P futures are holding net short. Both support the notion of higher prices,
although it’s noteworthy that both are also not far from shifting into bearish
territory.

NYSE TICK action remained positive Friday despite the selloff, continuing the
theme prevalent throughout the past week. TICKscore closed at +14, cumulative
Adjusted TICK +238. Both indicators remain in a pattern of higher highs, in
stark contrast to the choppy market action. It appears institutions view the
current environment as too dangerous to sell given the combination of deeply
oversold conditions and a Fed that could surprise the market at any time with
an aggressive cut. Fed funds futures are pricing in 100% odds of a 1/2 point
cut and 32% odds of a 75 basis point cut. That indicates the market’s
expecting unusually aggressive action on the part of the Fed, such as an
intermeeting half-point cut prior to January 30th and another half-point cut
at the meeting. In this kind of environment, you don’t want to be caught
leaning short into the ‘surprise’, and it appears this is one of the primary
reasons institutions have been better buyers this past week. Whether this
positive action persists beyond the end of the month is another matter. But
for the time being, the combination of institutional buying, a climactic
number of new 52-week lows this past week and outrageously negative sentiment
among small investors is likely to keep a floor under the market through
January.

Selling was concentrated in tech-related issues Friday, seen by the Nasdaq
advance/decline ratio closing well south of .50 as decliners more than doubled
advancers. Not too surprising to see tech remain weak short-term. There was a
clue this might happen when the solid rally day on January 9th failed to
produce a positive Nasdaq breadth reading (see my January 9th column for
details).

NYSE breadth wasn’t as negative, not quite reaching the 2:1 mark despite the
1.4% down day for the S&P. Cumulative breadth is still holding above its late-
November lows, keeping alive the positive divergence between the S&P and
breadth.

As we approach the halfway point in the month of January, it’s not a positive
sign to see the S&P down nearly 5%. Of course it’s not a foregone conclusion
that the month will end in the red given the potential for a Fed-induced
rally. But if the S&P does post a loss in January, it wouldn’t have positive
long-term implications. For one, the ‘January Effect’ setup would not be
triggered, a setup based on the fact that an ‘up January’ has led to an up
year for the market in 22 out of 24 occurrences since 1970 (see track record).
Additionally, a down January invariably means the S&P will post at least one
more subsequently lower monthly close. The table below notes every year since
1960 in which the S&P ended January with a loss. Note that out of eighteen
instances, the S&P posted a subsequently lower monthly close in every case,
either immediately or after an intermediate-term rebound…

S&P500 Closes out January with a Loss
2005 – Lower monthly close in two months
2003 – Lower monthly close in one month
2002 – Lower monthly close in one month
2000 – Lower monthly close in one month
1992 – Lower monthly close in two months
1990 – Lower monthly close in seven months
1984 – Lower monthly close in one month
1982 – Lower monthly close in one month
1981 – Lower monthly close in seven months
1978 – Lower monthly close in one month
1977 – Lower monthly close in one month
1974 – Lower monthly close in one month
1973 – Lower monthly close in one month
1970 – Lower monthly close in three months
1969 – Lower monthly close in one month
1968 – Lower monthly close in one month
1962 – Lower monthly close in three months
1960 – Lower monthly close in two months

Categories : Archived EOD Commentary, End-of-Day Commentary

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