So Goes January, Goes the Rest of the Year

The Bears are Back to Start the Year

For many stock market participants, January is the most important month of the year because it often dictates the character of the stock market for the rest of the year. There are three events to observe: 1) The Santa Claus Rally, 2) The First 5 Days, and 3) The January Barometer.

Yale Hirsch, Founder of The Stock Trader’s Almanac, said - “If Santa Claus should fail to call, bears may come to Broad and Wall.” The Santa Claus Rally was sabotaged by The Grinch as the S&P 500 was down about 1%. Now the bears appear to be back. Consider the negative Santa Claus Rally as Strike 1.

The First Five Days of January is another way to determine the character of the stock market for the year. Four trading days have passed in 2024 and the SPY is down 1.55%. If Monday 1/8 does not recoup that loss then we could consider that Strike 2.

Another Wall Street saying is “So Goes January Goes the Rest of the Year”. This is called the January Barometer and according to The Stock Trader’s Almanac it is 84.5% accurate. We’ll be watching to see how January goes, but the last time this worked was just in 2022 when the S&P 500 was down 2.45% in the first five days and down 5.54% in January. This resulted in the market dropping 18% for the year in 2022.

Cycles: The 18.6-Year Economic Cycle

The 18.6-Year Economic Cycle is great to see the general direction of the economy and its effect on the S&P 500. The chart below shows our modified version of the cycle all the way to 2030. In our opinion it is a bit too broad to trade off of, so don’t expect accurate trade entries from this cycle. Nonetheless, it has predicted the price action of the S&P 500 very well.

If this cycle continues to be correct, then it is a real possibility that 2024 will be a highly volatile year. It is forecasting a drop in January, a rebound starting 2/18 followed by a two-legged drop into the end of the year starting 7/4. If the January Barometer points to a negative January and therefore a negative year, it would support the 18.6-Year Economic Cycle that is Bearish until the start of 2025.

Looking further in time a significant stock market selloff is possible around July 2026 and Bearish conditions could last until January 2028. We advise our readers to be ready to implement capital protection tactics at these times.

For more accurate cycles to trade off of, check out our Cycle Forecasts here: https://cyclesedge.com/

Intermarket Analysis: Conditions Deteriorate

As the S&P 500 fights to stay above the 21 EMA, the 10-year Treasury rate (TNX), US Dollar (DXY) and oil all closed above their respective 21 EMAs. These conditions undermine the stock market rally. Higher interest rates compress valuations. An increasing US Dollar hints at investors cashing out of other investments (equities). An increase in oil caused by drama in the Red Sea could begin to erode the Fed Pivot narrative. This should be closely monitored.

Technical Analysis: An Overbought Pullback

For now, this looks like an overbought pullback within a greater uptrend. Notice how the down days are pretty orderly and we don’t see signs of a waterfall selloff. As price of the S&P 500 marches down, we do see participants buying the dip on significant volume. Price is below the 8 and 21 EMAs, which is a negative sign, however, price is hovering around the Middle Pivot Point around $469.

The MACD shows negative momentum within an uptrend (above 0). Net New Highs are waning, but still positive. A wave of Net New Lows would be a warning sign, but that has not happened yet. The Percent of Stocks above the 20 SMA (MMTW) oscillated from highs above 80% to 44%. Further downside may occur, as this breadth oscillator often reverses downtrends at the 20% mark. The McClellan Oscillator is below 0 and this negative breadth tells us to be wary of buying the dip now. The VIX is still low around 13, and a pop towards 20 could drop the market further. Finally, the Put/Call ratio (CPC) shows renewed put buying as participants hedge their portfolios.

Looking at this chart setup, price is likely to drop to either $460 or $454 before buyers step in with force. The $460 level is a confluence zone between the July 2023 high and the S1 Fibonacci Pivot Point (refer to chart above). It also coincides with the lower Bollinger Band at $459 and the 23% Fibonacci Retracement level, both shown in the chart below. In simple English, the $460 level should have a ton of support.

If the SPY continues to fall, the $454 level also has a confluence of support, coming from the 50 Simple Moving Average (green line two charts prior), the S2 Fibonacci Pivot Point, and the Anchored Volume Weighted Average Price (AVWAP or orange lines below). The AVWAP at $454 is the average price paid by participants from the October low or beginning of the rally and this level is likely to be defended. The AVWAP from the December 2023 high is at $472 and if price can get above that level, it would signify that the bulls are back in control. This has not happened yet.

Market Internals: Time to go Bull-Hunting

The Bulls had their turn for two months. Now the ball is in the Bears’ court. The McClellan Summation Index, a reliable breadth indicator, is reversing from overbought territory warning us that it’s wise to be cautious at the moment.

And this makes sense as we reached Extreme Greed in December so it is typical market mechanics to go the other way after an extreme.

Dumb Money bought in heavily over the past two months and as they get spooked, take profit and/or stop out, it’s normal for the market to retreat.

With retail now heavily invested in call options betting that the market will go up, it’s in the Market Makers’ best interest that the market does not go up. Thus a period of downward or sideways price action is warranted until retail call options are washed out (expire worthless or sold at a loss). Remember that the Market implements Max Pain and often does the opposite of what the masses expect.

Conclusion: Better Safe Than Sorry

The Technicals, Market Internals, Intermarket Analysis, Seasonality, and Cycles point to a volatile year ahead. To read more about 2024 Seasonality and our predictions for 2024 click here. The January Barometer is yet to complete, but when it does it could confirm that volatility is in store for the stock market in 2024.

For our Paid Subscribers, we’ll disclose our 1Q2024 Cycle Forecasts for the S&P 500 and Nasdaq 100. Note that Founding Members receive all of our Quarterly Cycle Forecasts for Indexes, Sectors, Cryptos, Commodities, and The Magnificent 7 sent out through email a few weeks before the beginning of the quarter.

Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.