Monday, January 13, 2014

January as a barometer

When it comes to calendar year cycles and seasonal tendencies, January is considered to be a tell-tale month. As goes January, so goes the rest of the year is the market adage.

We can't draw any conclusions yet given the month is only half over, however the first five days of January are frequently cited as having predictive ability in calling the market's direction for the rest of the year. The venerable Stock Trader's Almanac documents the following data:

Since 1950, S&P 500 performance for the first five trading days of January has been up on 40 occasions and down on 23. Of the 40 times when the five-day performance was up, the S&P 500 finished the year higher in 35 of those 40 years for an impressive 88% hit rate. For the 23 times when the first five days suffered a negative return, the S&P 500 ended higher only 12 times for a more meager 52% hit rate. Note that for all years since 1950, the S&P 500 had 47 up years and 16 down years, meaning 75% of the 63 years finished up. 

For the record, this year the first five trading days for the S&P 500 returned -0.6%. Also, many people debate whether this info is statistically significant, questioning the sample size and possible flawed assumptions concerning causality. I will let the reader draw his/her own conclusions, but in isolation I find the data to be at least interesting and worth mentioning.

As for an update on the market, let's review the daily chart.


The S&P 500 Index rallied in late December to reach the upper-boundary of what looks to be a developing ascending, broadening wedge formation. The Index has since pulled back some but continues to look a bit extended as it remains well above the 50-day moving average. Note the bearish divergence in the MACD (orange line) -- something I pointed out in November -- has not gone away.

That said the breadth picture appears very healthy.

The NYSE A/D line (lower inset) finally confirmed the S&P 500's move to new highs in late December and has since surged to new highs this year. It's a bullish indication to see the broader NYSE A/D line reach new heights despite the S&P 500 recently stalling at around the 1840 level.

The stock market clearly remains in a well-defined uptrend longer-term, however in the very near-term the following chart is a bit concerning:

The YTD hourly chart of the S&P 500 shows numerous abrupt reversals, with rallies suddenly reversing course and swiftly taking dives (red boxes). All of this action is occurring within a fairly tight range (1820-1840) and it could simply infer a period of investor confusion or indecision regarding what lies ahead in the immediate future.

Ultimately a price breakout of this range, up or down, will obviously help to clarify the likely ensuing direction for the market. But until that occurs, such frequent and abrupt intra-day reversals with wide-range bars/candles are worrisome and something to monitor.

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