January Barometer Theory: Stocks Start 2020 With A Blast

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Commenting on today’s trading and focusing on the January barometer theory, Gorilla Trades strategist Ken Berman said:

Although financial markets were slightly turbulent to start the year, with wild moves across asset classes, bulls remain clearly in control on Wall Street. The beginning in January usually brings strongly trending moves, and today’s session lived up to the expectations, and while the fact that small-caps clearly lagged the broader market, the new all-time highs in the indices could mean that the year-end rally will continue in 2020.

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The major indices started the year in spectacular fashion, erasing the pullback of the last days of 2019 and hitting new all-time highs as traders returned in droves following the holiday period. The Dow was up 330, or 1.2%, to 28,869, the Nasdaq gained 120, or 1.3%, to 9,092 while the S&P 500 rose by 27, or 0.8%, to 3,258. Decliners outnumbered advancing issues by a 5-to-4 ratio on the NYSE, where volume was slightly below average.

January barometer theory and the S&P 500

Following the calm and bullish days of December, today’s session was very exciting both for long-term investors and short-term traders. While almost all of the key sectors gained ground, we saw strong divergences between them. The defensive utilities sector got hit hard as global risk assets surged higher, and healthcare stocks also lagged behind the major indices. Tech stocks and industrials were the stars of the day, but services and financials also performed well, thanks to the Chinese monetary stimulus that might be able to halt the deterioration of the global economy.

Semiconductors spearheaded the rally in the crucial tech sector, and since the subsector is considered highly cyclical, its relative strength suggests that more and more investors believe in a global economic turnaround in 2020. The People Bank of China’s (PBOC) move to further increase liquidity boosted investor confidence as well, and even though small-caps were relatively weak and Treasury yields ticked lower, risk appetite seems to be strong even after the blowout December for equities.

We will already have the first really busy session of the year tomorrow, in terms of economic releases, with all eyes on the struggling manufacturing sector. Although the Chicago PMI came in slightly above the consensus estimate on Monday, tomorrow’s ISM manufacturing PMI usually has a much bigger impact on financial markets and the measure missed expectations five times in a row in the second half of 2019. Analysts forecast a slight uptick to 49.0 in the indicator, but that would still signal contraction.

Federal policy in focus

We will also have construction spending and the weekly crude oil inventory report coming out, and the late-session release of the minutes of the Fed’s recent meeting could mean that the week will end on a volatile note. The Central Bank’s stance was surprisingly dovish last month, despite the solid domestic growth figures. The minutes could reveal more hawkish opinions among the FOMC members, and that might trigger knee-jerk selling in the wake of the historic rally of the past few weeks and the confirmed trade deal with China.

Technical Corner.  Despite the pullback of the last session of 2019, there is no doubt about the general direction of the stock market, with all of the key trend indicators still pointing higher. Beyond the January barometer theory, the major indices continue to be well above their rising 200-day moving averages of 8,118 for the Nasdaq, 2,970 for the S&P 500, and 26,741 for the Dow. The benchmarks are also clearly above their steeply rising 50-day moving averages of 3,125 for the S&P 500, 8,592 for the Nasdaq, and 27,842 for the Dow.

There are several statistical studies claiming that the month of January is special when it comes to stocks. While there are good reasons to believe that tax considerations and portfolio rebalancing could cause anomalies, such as the positive ‘January effect’ and the ‘January barometer’ theory, basing investment decisions only on those is probably not a good idea. That said, the strong trends in the early days of January still do seem to provide some information about what to expect in the New Year, this is the January barometer theory, and based on today’s session, we could be in for another strong year for equities. Stay tuned!

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