Market Analysis

January Market Lessons

There are many lessons from January’s market action and in keeping with my 2017 Market Lessons and the 2018 Market Outlook I wanted to highlight a couple of pieces that stuck out for me.

It’s been said that overbought can stay overbought for a long time and certainly in January market participants were flooded with overbought readings not seen during our lifetimes as record after record was broken and I’ve shown many charts on twitter documenting these historic readings.

Just taking the $DJIA here on a monthly basis we witnessed readings never seen before as the $DJIA closed at its highest monthly RSI since 1900:

Yet despite the relentless parabolic action up there were tradable signals and entry opportunities.

For example: If you been reading the Weekend Chart updates you’ll be familiar with the 15 min chart that has proved itself to be a consistent guide since last Fall as even smaller pullbacks have disappeared all together from the market landscape (until this week). This chart proved a tradable guide in January as well and for us it remains a chart to watch for any changes in market behavior:

Does this week’s break lower constitute such a change?

On the technical front it certainly did as the relentless change upwards was finally broken to the downside:

As surprising as the relentless move upward was the break of the trend was well signaled in advance. I had talked about it in Rising Volatility I & II.

See, and this is another key lesson here, markets continue to act very technically and too much of a good thing (or bad thing) can bring about a technical reaction.

I suggested such a reaction coming last Friday:

And sure enough we saw a sizable rejection of price into month end yesterday:

You can attribute it to month end rebalancing or to rising yields or fear of the Fed, but at the end of the day, in my view, it was largely technically driven.

But nevertheless here’s another lesson: This market is not bulletproof. Far from it.

Although to be fair it looks bulletproof, as it only goes up. Here’s the FTSE All World Index:

15 months of consecutive up, asset price inflation like we haven’t seen before since the 2000 tech bubble. Except that 2000 bubble was largely confined to tech, this bubble is everywhere. As Alan Greenspan called it, it’s a bubble in stocks and bonds driven by debt.

And still, with unemployment near all time lows, parabolic stock markets showing uninterrupted and uncorrected gains amidst the loosest financial conditions in decades and still all the major central banks could not muster the courage to hint at any tightening in policies.  Big Little Lies by Central Bankers I called it and yesterday Janet Yellen left as the dove she came which really surprised no one. The gambit was clear as I outlined in Fed Shock & Awe: “Nah, why risk it, probably be best to just pass the bubble and smile”.

The lesson: Central banks still can’t bring themselves to align current policies with previous cycle conditions suggesting there’s a huge gap in narrative, a point I made on Trading Nation this week:

We will get a lot more clarity during Jerome Powell’s first meeting as chair in March whether he will deliver shock & awe or not. But for now the evidence is central bankers remaining scared of upsetting the market beast.

One final, and perhaps forward looking take-away:

Global stocks hit the wall technically at the same spot they did in the spring of 2007: A monthly RSI above 84 just as volatility is making its presence felt:

Call it a coincidence if you want, I call it technicals. Back then the initial solid correction was bought for new highs on a negative divergence then marking the top of that cycle.

We’ll see what the next few months bring, but the big lesson again in January: Technicals matter big time and finding the actionable signals in either direction remains our key task.

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