Hello everyone! Happy 2023! I hope everyone seems to be able to welcome the brand new 12 months with happiness and positivity. Unfortunately, there may be a likelihood that the exchange (SPY) is planning on doing exactly the other. Let me walk you thru what I see.
(Please use this updated version of my weekly comment posted on January 3, 2023 from The POWR Growth Newsletter).
At the start of last week’s comment, Reity wrote“the standard bullish attitude of Christmas is just not at hand this 12 months…”
This has been the case for the previous few days. And that – together with two other technical signals I’m going to point out you today – is why investors should be careful as we enter the brand new 12 months.
I do know. technical evaluation? Really?
And the reply is yes! Really!
I do know lots of us imagine that reading charts is as scientific as reading tea leaves, but every thing I’m going to point out you relies on logic. We don’t draw cups and saucers or vomiting camels (my personal favorite chart pattern).
Let’s start by this weekly S&P 500 chart (SPY). When you take a look at technical patterns, longer periods (weeks as an alternative of days) are at all times more significant. Any technical indicator – signal, trend, pattern, etc. – must be stronger as a way to appear on the weekly chart.
This weekly chart is bearish. The most simple definition of a downtrend is a a series of lower peaks and lower minima. And that is generally what we saw in 2022. While the rallies in the summertime and autumn aroused emotions, they didn’t break the downward trend.
And that is not surprising when you consider it. The market was filled with negative news in 2022. Supply chain problems. Inflation we just couldn’t eliminate. Rising rates of interest. The most hawkish Fed we have seen in many years.
Just think how repeatedly Reity has pulled his hair out during all of the “gatherings of fools” we have seen this 12 months. No one really thought these rallies would last. They were guided only by irrational enthusiasm, not positive grounds. Therefore, the market remained in a downward trend.
This is the primary technical signal to be cautious – an ongoing downtrend within the broader market.
Next is certainly one of my favorite technical indicators… VIX and its moving average.
For those less familiar, the VIX is sometimes called the “fear” indicator since it “moves higher when fear rises.” But that is really a simplification of what we’re .
What the VIX measures is volatility, specifically volatility for the S&P 500. Without going into all the maths, the VIX is calculated based on the costs of S&P 500 futures options.
When the market falls sharply, institutional investors buy futures contracts to hedge. (This is essentially the most efficient way for them.) Buying them raises the value of options because higher demand means higher prices, just as higher demand for stocks raises their price.) Higher prices are being introduced into the VIX formula, and the VIX is rising.
So a high or rising VIX signifies that the “smart” money – those big, institutional financial giants – think the market goes to fall in the following 30 days. That’s quite a bearish sign.
Which brings me to our next chart.
Below you will note the identical S&P 500 weekly chart (SPY), but this time with a box underneath. In this box is the VIX (black line), in addition to the 10-week moving average – or roughly the very fashionable 50-day moving average – for the VIX (dark blue line).
When the VIX (black line) crosses its moving average (dark blue line), it tells us that volatility is rising (bearish)… and greater than usual (much more bearish).
Last week, the VIX crossed its moving average. This doesn’t suggest we’re guaranteed an enormous selloff, nevertheless it does tell us that enormous institutions are taking increasing hedging positions for the following 30 days.
It’s not magic. Nor is he particularly optimistic. And it’s definitely price listening to.
Finally, we come to our third call to caution. This lack of holiday spirit…
“If Santa doesn’t call, the bears may come to Broad and Wall.”
This is an old trader’s reference to the Santa rally I wrote about last week, and to the placement of the New York Stock Exchange (on the corner of Broad Street and Wall Street).
This old saying is straightforward to envision. If the S&P 500 fails to show a profit within the last five trading days of the 12 months and the primary two trading days of the brand new 12 months, we should always have a likelihood to purchase stocks at much lower prices later within the 12 months.
In the last 50 years, only 12 times has the S&P reported a loss during this time. It closed 4 times the next 12 months. There were five double-digit declines.
It might sound that there is just not much to this concept. But within the years that follow the Christmas lows, there may be a slight bias towards the bears.
Overall, there may be a 33% likelihood of a decline next 12 months versus a 24% likelihood of a rise. The likelihood of a double-digit decline is 42%, much higher than the 24% likelihood of a double-digit decline in years with growth.
Can the performance of seven specific trading days really determine whether the stock market may have an up or down 12 months?
Of course not. But, just like the two other technical indicators I showed you, it might probably be a vital reflection of how traders (each big and small) are feeling at the beginning of the 12 months.
From what we have seen…
There is just not enough positive fundamental evidence to interrupt the continuing downtrend…Majors are hedging with increasing collateral for the following 30 days…And while this is just not the “nail within the coffin” for 2023, I believe a failed Santa rally would start the 12 months with bearish start.
Tomorrow we’ll know of course; if the S&P 500 closes below 3822.39, we’ll know “2022” was on Santa’s naughty list.
All of this looks like a superb reason to proceed with caution over the following few weeks.
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SPY shares fell $0.26 (-0.07%) after trading hours Wednesday. SPY has gained 0.35% because the starting of the 12 months, in comparison with the proportion gain of the S&P 500 benchmark index over the identical period.
About the Author: Meredith Margrave
Meredith Margrave has been a renowned financial expert and market commentator for the past twenty years. He is currently the editor of POWR increase and POWR shares below $10 newsletters. Learn more about Meredith’s past, with links to her latest articles.