Seasonal:
Bullish. January is the third month of the Best Six/Eight, but it is the last of the Best-Three-Consecutive-month span. January is the top month for NASDAQ (since 1971) averaging 2.6%, but it has slipped to sixth for DJIA and S&P 500 since 1950. Pre-election-year Januarys have been exceptional (DJIA +3.7%, S&P 500 +3.9% NASDAQ +6.6%). The Santa Claus Rally ends on January 3rd and the First Five Days early-warning system ends on the 8th. Both indicators provide an early indication of what to expect in 2019. We will wait until the official results of the January Barometer on January 31 before tweaking our 2019 Annual Forecast.
Psychological:
Neutral. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 39.3%. Correction advisors are at 39.3% and Bearish advisors are 21.4%. At current levels, sentiment is essentially flat. Bearish advisors have ticked modestly higher but are still just a few percentage points above their level when the market was at all-time highs a few months ago.
Fundamental:
Firm-ish. Near-term the outlook remains reasonably solid. Unemployment is low, the economy is still creating jobs each month, corporate earnings, although slowing, are forecast to continue growing and Atlanta Fed’s GDPNow model is forecasting 2.9% growth for Q4. Beyond the near-term the outlook becomes murky. The housing market and the auto industry are feeling the bite of higher interest rates already. Foreign markets are struggling, more tariffs could be coming, and the Fed has forecast a slowdown in growth in 2019 and 2020. One may want to consider that the Fed does not have the greatest track record forecasting growth and it has admitted such.
Technical:
Broken down. DJIA, S&P 500 and NASDAQ have all closed below support at their respective lows from earlier this year. Death crosses appear on the charts of all four. Russell 2000 is in the worst shape down over 27% since its high to officially be in a bear market. Dow Theory is also signaling the possibility of a new bear market, but utilities have not broken down yet. Technical indicators applied to the major indexes are near or at oversold levels.
Monetary:
2.25-2.50%. The Fed did take a somewhat less hawkish tone at its recent meeting, but it apparently was not dovish enough. After raising interest rates for the fourth time this year, the Fed suggested fewer hikes will occur next year which was a mild win for the bulls. However, the Fed failed to mention any possibility of slowing the rate at which is reducing its balance sheet. In the end only the slightest of shifts away from its previously hawkish tightening monetary policy. Even a moderately hawkish Fed is still the greatest risk to the economy and the market. The continued flattening of the Treasury yield curve is the market signaling to the Fed it is time to pause and even consider easing up a bit.
JAN
2019