Phases & Cycles Market Outlook – February 2, 2021
Our last Market Comment spoke about two measures that, based on Stock Exchange folklore, forecast the direction of the market towards yearend. The first is based on what the market does during the first five days, and the second looks at the market’s behavior during January.
Based on the Stock Trader’s Almanac (STA) “When stocks finish the first five days higher, the S&P 500 has been positive more than 80% of the time at year-end with an average gain of about 13%“(we included a chart showing the results from 1999 in our last Market Comment). This is good news, since the S&P 500 Index (SPX), the NASDAQ Composite Index (NASD) and the S&P/TSX Composite Index (TSX) all ended higher during those first five days, at 1.8%, 2.5% and 3.5% respectively.
The second, “the January barometer”, is what the brokers in New York refer to as “so goes January, so goes the year”. It looks at the performance of the first complete month compared to the year-end results. Quoting the STA once again “it has registered only nine major errors since 1950 and been accurate 74.6 percent of the time, and if relatively flat years are excluded, the accuracy rate gets even better: 86.6 percent”. As we now know, due to the weakness of the last four days of January, the month ended with mixed results, the SPX, the NASD and the TSX closed the month at minus 1.1%, plus 1.4% and minus 0.6%. It is a small consolation to know that without the last four days of January, in other words without the interference of the “short-squeezers”, the month would have ended at plus 2.5%, plus 5.7% and plus 2.0%!
Outlook.
Let’s look at the indicators. The SPX, the NASD and the TSX appreciated 13.6%, 19.8% and 11.3% since the October 2020 lows and moved up in a narrow but rising up-channel (see charts on the following page). During this time, the percentage of stocks above their 10-week Moving Averages increased from 48% to 84% and those above their 30-week Moving Averages increased from 56% to 89%. At the same time, the number of stocks hitting New 52week Highs increased from zero to an average of 200 (not counting EFTs etc.) creating what is called an over/bought (o/b) condition. We know that o/b conditions can exist for a long time, but sooner or later such conditions must give way to a minor correction, which has already started (see charts on the following page). To quote from our last Market Comment “A change of direction will likely begin in mid-February and lead to a corrective period toward late-March”.
A decline to SPX 3500 would be 8%, NASD falling to 12,000 would be 7.7% and TSX declining to 16,600 would be only 5.1%. As the percentages indicate, just a minor correction.
PAC-20-198; MKT-501; February 02, 2021
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC, H3Z 1J9
Tel.: (514) 393-3653. E-mail: RonMeisels@phases-cycles.com
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This article was prepared by Phases & Cycles Inc. and does not necessarily reflect the opinion of iA Private Wealth Inc. The opinions expressed are based on an analysis and interpretation and do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.