Increasing evidence of a Choppy 1st Quarter

Near-term trends remain bullish from last week in US Equities, but the larger trend has definitely shown some stalling out since mid-December, and this larger churning still really hasn’t been resolved.  The bounce in US Dollar and Treasury yields has not yet turned back down in a way that would likely be helpful towards Equities.  The cycle for 1^st Quarter in SPX and DJIA looks mixed, and this directly gels with election year seasonality that argues for a possible choppy period which eventually should begin to lead higher by March/April.  At present, the near-term picture is not crystal clear on a 3-5 day basis as breadth has begun to wane, and requires some strength literally right away to avoid a pullback.

Overall, recent price action hasn’t provided much to talk about, as the October-December surge has quietly been undergoing consolidation in recent weeks.  Despite Technology having successfully held where it needed to relative to SPX, there hasn’t been any real surge to speak of that would help US Equities resolve the recent churning, in either direction.

While near-term trends remain bullish from last week as well as bullish from late October of last year, the trend from December has been remarkably range-bound, as the Equal-weighted SPX chart shows below.  I expect that January should prove positive, but much of this strength might come about in the last week of January.  As my January seasonality chart showed last week, the month might prove to be a bit choppier than either Bulls or bears would like in the short run.

Given the combination of cycle composites, seasonality trends, and breadth levels, the time which might prove to be challenging could be February-March of this year.  Any decline into the end of 1^st Quarter could provide opportunity for investors given the bullish intermediate-term breadth.

RSP

A couple of key factors argue for a range-bound Q1 ahead of the larger rally back to new highs:

1. Seasonality for Election years typically has shown a lackluster, choppy Q1 before prices push higher into August/September.
2. Sentiment has grown more optimistic lately on the retail side based on traditional polls like AAII, Investors Intelligence and Fear and Greed.
3. Cycles show volatility and back and forth trading before turning up in a more symmetrical manner after Q1 is complete.
4. The cycle composite for Treasury yields looks to hold up until March before turning down sharply into August.  I expect this might prove to be one of the better times for investors this year, along the period directly following the US Election.
5. Breadth has been waning a bit from an extended state lately and MACD has rolled over on charts of McClellan’s Summation Index following the push in SPX above 90% in percentage stocks > 50-day moving average.
6. DeMark-based exhaustion is present on daily and weekly charts of SPX.

In the short run, I expect this means that a move immediately above SPX-4900 is doubtful right away.  However, I also expect that SPX-4600 likely contains prices to the downside in January.  Thereafter, this year’s largest correction very well might happen in February into March on a bounce in rates, along with the period from August into November. (This is based on a combination of both cycles and seasonality studies.)

Markets which show rapid breadth escalation from low to high have shown promising results

Our recent breadth escalation from late October into late December proved to be nothing short of astounding.   Most market participants realize that most of 2023 proved quite difficult until November came along.

The percentage of SPX names above their 50-day moving average escalated quickly from below 15% to above 90% by year-end.

Looking back since 1990, this has happened on 10 occasions where the breadth escalation has proven so robust in such a short period of time.  While the future doesn’t always mimic the past, it’s important to see what happened on past occasions.

As shown below, on a 1-month, 3-month, 6-month and 12-month basis, SPX has shown above-average returns.   While I suspect that the 1^st quarter might indeed prove choppy, I suspect that 2^nd and 3^rd quarters of this year could be much better.   Data since 1990 is shown below:

Seasonality normally can show a tough 1^st quarter in Election years before turning up sharply

Election year seasonality typically can result in a sideways 1^st quarter if history repeats itself.  Below is a chart of “All Election years since 1950”.

A choppy period would make sense given that breadth and momentum rose dramatically to extended levels and have now been consolidating.

Interestingly enough, the upward swing from 1^st quarter in Equities based on this Average seasonality chart since 1950 directly matches my Treasury yield cycle composite downswing that starts in March and lasts until August.

Overall, based on the chart below, the most promising times for investors for 2024 based on seasonal tendencies alone would seem to be March-August and then November into year-end.

RSP

Russell 3000 has failed to get above all-time highs;  Meanwhile some SPX breadth gauges have reached extended levels

As shown below, the percentage of SPX names above their 20, 50, and 200-day moving averages moved up to levels that had coincided with peaks in the SPX last July, last February, and then late 2021.

Breadth has waned a bit in the last couple weeks as the percentage of SPX names above their 20-day moving average moved from >90% to its current 66%.

Yet, the percentage of SPX names above their respective 50, and 200-day moving averages are still at 90% and 76% respectively.

The IMV, or iShares Russell 3000 ETF, is shown on the top portion of the chart, and stalled out prior to achieving any new all-time high close.  (Meanwhile the breadth gauges are SPX-based.)

Thus, while the near-term trend remains bullish from last week, a pullback in February into March would make sense towards helping to alleviate some of these breadth gauges below along with coinciding with both cyclical and seasonal trends. 

At present, there hasn’t been sufficient weakness to call for any sort of larger pullback, and the short-term trend is still bullish.

IWV