As we head into the end of January, technical conditions in major stock indexes are showing a lot of strength. We see solid justification for short-term (< 2 week) swing longs, with the potential to extend those trades into further swings if supported by market action. In the chart at the top of this post, we see pressure against, and a possible break, of a longer-term trendling.
Yes, we still hold longer-term concerns, and find the inversion of the yield curve a distressing signal for the market. Frankly, we think a bear market that could easily trim 50% from indexes is in the cards, but timing is everything. It’s certainly possible that indexes could make all-time highs before rolling over into a bear market. We see no contradiction in being longer-term bears but short-term, aggressive, bulls (and, to be clear, we remain bulls on very long timeframes. Bear markets are times to buy stocks for enduring wealth.)
Fitzgerald said “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” Perhaps the current market is a test of that ability.
Other potentially bullish factors
Our MSI has moved into the Comfort zone. While there is no clear signal here, strength from Breadth and Technical factors confirm underlying bullish conviction.
We looked at sector leadership through our bubble diagram a few weeks ago. Recent weeks have seen Tech and Discretionary move further to the right, indicating more outperformance and leadership from these risk-on groups. Note that defensive sectors remain solid underperformers; this is another confirmation of market optimism.
We watch the spread between Discretionary and Staples as another barometer of market psychology. We find price action-driven measures more more reliable than surveys, and this measure shows traders are comfortable in this environment and are likely expecting higher prices.
Here is another relative performance presentation, showing that Energy has given up some leadership to Tech and Discretionary.
All of these measures are confirming, not leading, indicators, but they rather strongly support what we see in price action and market structure.
The week ahead (potentially market-moving datapoints)
- Monday: None
- Tuesday: FOMC Meeting begins, Case-Shiller Home Price Index
- Wednesday: ADM Employment, Manufacturing PMI, ISM Manufacturing, JOLTS, FOMC Report
- Thursday: Jobless Claims, Productivity & Unit Labor Costs, Factory Orders
- Friday: Nonfarm Payrolls, Unemployment Rate, Services PMI, ISM Services
Approximately 950 names report earnings this week
