Daily Gains Letter

January Volatile for Stocks, but Bull Market Not Over Yet

By for Daily Gains Letter |

Bull Market to Continue This YearMany of you are probably happy to bid farewell to January. Not only was the weather nasty, but the stock market also traded in a volatile manner, with the bias to the downside.

The month ended in the red, with the major stock market indices trading below their respective 50-day moving averages and looking lower. The S&P 500 is below 2,000 once again and has been unable to get its footing above with any sustained momentum (as you can see in the chart below).

For traders who follow the historical cycles of the stock market, we know that the negative month suggests the stock market is in for some difficult times this year. But I’m not convinced the bull market is over quite yet.

Large Cap Chart

Chart courtesy of www.StockCharts.com

When the markets start January down, the tendency is for a down year for the stock market about 80% of the time, but that is not always the case. As we saw in 2014, January also produced a down month but recovered with an up year. That month, the decline in the Dow and S&P 500 was greater than this January’s, but the S&P 500 subsequently closed higher in eight of the next 11 months.

S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

Now, I’m not suggesting the same will materialize this year for the stock market, but it’s something to keep in mind as we move into February, which saw the markets bounce back in 2014.

The key for the main stock indices will be the 200-day moving average (MA), which is just below where the indices are sitting at now, with the exception of the NASDAQ. But even a break at the 200-day MA would not be a big deal unless the 50-day MA was to break below the 200-day MA.

Bull Market to Continue This Year?

It’s clear the stock market is hesitant, but I’m not ready to pronounce an end to the six-year bull market. I feel the rest of the year will be much like 2014, when trading was cautious.

Watch the investor sentiment readings to gage the overall feeling for the stock market. In January, we had only five bullish readings for the NYSE and two for the NASDAQ. The plus was there were no bearish sentiment days, with the sentiment being largely neutral. A reversal to more bullish readings would be an indication of a possible stock market reversal.

High-Low Ratio Chart

Chart courtesy of www.StockCharts.com

We also need to see higher volume on the up days, which was largely absent in January. On the NASDAQ, for instance, we only saw one session with more than two billion shares traded. At that point, the stock market could reach lower before a rally.

The S&P 500 is only down less than five percent from its record, so there could be additional weakness to come.

Investment Strategies to Consider Based on January’s Stock Market Action

I would view major stock market weakness and chaos as an investment opportunity to accumulate positions, as I don’t feel the bull market is dead quite yet.

As a more conservative strategy, on downside weakness, investors could consider exchange-traded funds (ETFs) that are focused on the key stock indices, such as the SPDR S&P 500 ETF (NYSEArca/SPY) or the iShares Russell 2000 (NYSEArca/IWM) for exposure to small-cap stocks.

I’d also recommend investors keep an eye on oil prices, which will continue to be the wildcard going forward. On Monday morning, the West Texas Intermediate (WTI) oil prices were holding at $48.75 a barrel. The upward push after oil fell to $44.00 was positive and should add some stability to stocks. Having said that, I’m not convinced the downside moves in oil are over. A sustained breakout at $50.00 would be a good start.

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