Stock Market Outlook
For The Week Of January 12th =
Downtrend

ADX Directional Indicators: Downtrend
Institutional Activity (Price & Volume): Downtrend
On Balance Volume Indicator: Uptrend

ANALYSIS

The stock market outlook shifts to a downtrend, after failing to recover support levels and making lower lows on higher trading volume.

The S&P500 ( $SPX ) dropped 1.9% last week.  The index is ~2% below the 50-day moving average and ~5% above the 200-day moving average.

SPX Technical Analysis - January 12 2024

The ADX remains bearish, overall trend strength is weak.  Institutional activity wasn't particularly strong, struggling to bounce from the 50-day moving average.  During that time, we've accumulated enough distribution days (>5) to move this signal from mixed to bearish.  On-Balance Volume faded since early December, but remains in bullish territory for now, thanks to the lower trading volumes during the holiday season.

Energy ( $XLE ) was the strongest sector again last week, benefiting from strong performance in oil and gas.  Real Estate ( $XLRE ) led to the downside. Communications, Financials, and Technology, as well as the overall index ( $SPY ), fell to a bearish bias.  Consumer Discretionary ( $XLY ) remains in a bullish trend, though that sector's returns haven't been positive over the past 4 weeks.  Energy provided to "best" returns during the same span, only down ~3%; real estate was the worst performer, losing ~11%.

High Beta was last week's top performer, securing the only positive return.  High Dividend led to the downside.  High Beta and Momentum fell from Neutral to Bearish; Large Cap and Mega Cap shifted from Bullish to Neutral.

Oil ( $USO ) led the way higher again last week, edging out Gold ( $GLD ).  Bitcoin ( $IBIT ) was the worst performer.  Gold jumped from bearish to bullish bias.

Generally speaking, physical commodities have outperformed other asset classes over the past 4-weeks.  Within the commodity space, it's been oil, natural gas, and copper leading the way, while precious metals and agriculture have struggled.

COMMENTARY

With the market outlook fell to a downtrend last week, it's time to drop the zero's and get with the hero's in your portfolio.  Recent downtrends have been short-lived, and On-Balance Volume gives us some hope this one will be similar.  So stick with tickers showing signs of strength right now (higher highs and accumulation); those will be the names that lead the market higher when the latest round of selling ends (i.e. when bullish bias returns).  If you haven't already, consider reducing exposure to tickers that are floundering.

On the Macroeconomic front, December Services PMI showed continued expansion, coming in at 54.1; higher than November and above expectations.  November job openings (JOLTs) also increased, beating expectations and an upwardly revised October figure.  And December NFP (Non-farm Payrolls) was well above expectations and a lowered November data point.

Remember the stock market is not the economy.  They're related, but not the same.  The economy is sum of all economic activity, including the production and consumption of goods and services, and we get updates monthly at best.  At worst, data can be revised more than 1 year after the fact.  The stock market is collection of equity stakes in publicly traded companies and is updated almost continuously.    The tables above show equities haven't performed well over the past 4 weeks.  We won't start getting the matching economic data until next later this month.

Most sectors and styles are bearish, and even the ones showing some strength are still in the red.  This price action tells us that sellers have been more aggressive than buyers in the equity markets.  There are many potential causes of this behavior; most of them are interrelated.  For example, some may expect weak earnings and guidance because of a strong dollar, higher interest rates, higher commodity prices, and/or the potential impact of higher tariffs across the globe.  Earnings season starts this Wednesday with reports from large financial firms ( $JPM, $C, $WFC )...

Whatever the cause, you want to put your money to work when conditions are favorable for future gains:  higher highs and higher lows in price ( ADX and Bias ) , caused by institutions accumulating shares and capital inflows ( Institutional Activity and On-Balance Volume ).   In the recent past, downtrends have been short-lived, so we could see better conditions next month, next week, or even tomorrow.

This week, we get the latest retail sales and inflation (Producer and Consumer Price Index) numbers.

Best to Your Week, and Happy New Year!

P.S. If you find this research helpful, please tell a friend.
If you don't, tell an enemy.

Sources: Bloomberg, CNBC, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics

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How to Make Money in Stocks: A Winning System in Good Times and Bad.

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