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.”
Read Jeff’s comments carefully. Excluding the 11-major “errors,” in the table above, a down Janu