As we flipped the calendar from 2020 to 2021, investors were more than happy to leave the Year of the Rat and optimistically shift towards a return to normalcy and better times ahead in the Year of the Ox, which is close enough to a bull for us. January saw any unusual events like the unprecedented spectacle that occurred on 1/6 at the US Capitol, a transition of power in Washington DC, retail investors attempting to battle the Hedge Fund community, and the return to the Super Bowl of Tom Brady as the oldest quarterback to get back to the big game.

The combination of these things along with many other headline news items contributed to the S&P rallying over 4% but then ending January down 1%. Many had feared that this was the beginning of a large correction in equity prices. I was not one of those as my work suggested otherwise.

Thus, the weakness that occurred during the last week of January is likely over. My most aggressive tactical indicators have now flipped back to short-term bullish. Remaining above 3820 keeps me tactically bullish. I will be on alert for a downward move below 3800, which would be problematic and likely cause my models to shift back to tactically cautious/unfavorable.

The trade based on our research is to be back in offense, mostly Value/Cyclicals, part Growth/FAANG. On the other side of the coin, our work suggests less exposure, or outright short positions, in defensive areas of Staples, Real Estate, and Utilities.

Importantly, our underlying bullish macro catalysts haven’t changed despite the recent volatility and subsequent rally.

  1. The Fed is still likely on hold and interest rates will remain low for an extended period. Thus, the favorable liquidity environment will not be interrupted soon.
  2. The rate backdrop near record-lows remains very supportive of equities.
  3. The earnings revision data for the broad equity market, which has a big impact on our process is still robust. This shows the rate of change in the depressed future consensus profit expectations in late-March and early-April is still getting ‘less bad’ for the broad universe of names. Within both the S&P 500 and the S&P 1500 as shown by our proprietary Analyst Sentiment Measure (ASM).

Most preferred sectors: Consumer Discretionary, Industrials, and Materials. With Financials and Tech also being better than neutral.

Neutral sectors: Comm Services and Energy

Least preferred sectors: Utilities, Staples, Real Estate, and Health Care below neutral.

Bottom line: The weakness that occurred during the last week of January is likely over. My most aggressive tactical indicators have now flipped back to short-term bullish. Remaining above 3820 keeps me tactically bullish. Below 3800 would be problematic and likely cause my models to shift to tactically cautious/unfavorable.

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