Technically Speaking: Is A Larger Correction Coming?

In last week’s Technically Speaking post we discussed why we reduced risk in anticipation of a pullback in the markets. However, there are some warning signs which beg the question “is a larger correction coming?”

A Tough Start

What started out as a promising January, didn’t end up that way as markets dipped into the red for the year. More importantly, February tends to be a weak month which suggests the selling may not be over just yet. Such is particularly the case, as we will discuss momentarily, with many areas of the market technically stretched and over-valued.

As our colleagues at StockTrader’s Alamanac point out:

Devised by Yale Hirsch in 1972, the January Barometer has registered eleven major errors since 1950 for an 84.5% accuracy ratio. This indicator adheres to the propensity that as the S&P 500 goes in January, so goes the year. Of the eleven major errors, Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001. The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. The eleventh major error was last year, 2020. Including the eight flat years yields a .732 batting average.

The near-term outlook for the market has diminished as every-down January since 1950 was followed by a new or continuing bear market, a 10% correction, or a flat year. However, it is challenging to envision a full-blown bear market with the Fed keeping a close eye on the market and the new administration working on additional fiscal stimulus.”

Larger Correction Coming, Technically Speaking: Is A Larger Correction Coming?

Read Jeff’s comments carefully. Excluding the 11-major “errors,” in the table above, a down January predicted a negative year 73% of the time.

Importantly, note the weakness that tends to follow in February.


Short-Term Technical Indicators

Last week’s sell-off sudden reversal may have been just a “warning shot.”  As noted in this past weekend’s Real Investment Report:  (For free email delivery click here)

While I fully expect a reflexive rally next week, that will likely be an opportunity to reduce risk rather than chasing markets. Such will be the case until we see money flows start to turn positive again, suggesting some underlying buying pressure.”

Yesterday, the market did indeed bounce as expected. However, while the market did hold support at the 50-dma, the “money flows,” in the middle-panel, are still weak with a “sell signal” currently in place.

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Adam Reynolds 4 weeks ago Member's comment

How relevant are those stats keeping in mind that we haven't had a pandemic in over 100 years?