After a disastrous start to the new year, the stock market finally seems to be getting its footing. The S&P 500 gained 1.4% in the week ended January 22. That follows a 2.2% drop in the previous week and a 6.0% plunge in the first week of the year. While the tone is better, however, in my mind the burden of proof for the future direction of the market is now on the bulls.
The action of the stock market since its most recent peak on Nov. 3, 2015 (when the S&P reached an intraday high of 2116.48) has been decidedly bearish. Since then, the S&P 500 has made two lower highs and two lower lows. (By definition, a downtrend is defined as a series of lower highs and lower lows.) In addition, on Tues., Jan. 19, the S&P 500 hit an intraday low of 1812.29, below its August 2015 low of 1867.01.
Although the S&P 500 quickly recovered and is now trading above that August low, the damage to the uptrend has been done. Most technicians are looking for some sort of rally to take hold soon (because stocks are oversold); but the key question is whether it will be a temporary partial retracement of the January decline or the resumption of the long-term bull market. The jury will be out until either the S&P 500 advances above 2081.56, the immediately preceding high set on Dec. 29, or breaks below the newly established low of 1812.29.
Although last week’s rally was welcome (unless you were short), the trading action suggests that the gains were probably due more to flight-to-safety buying than to investors stepping in to buy cheap stocks. The sectors that rallied the most included Telecom Services, Consumer Discretionary, Technology, Energy and Consumer Staples. Laggards included Financials, Industrials and Materials.
Telecom Services rallied primarily because of a good earnings report from Verizon. (Verizon and AT&T dominate the S&P 500 Telecom Services sector.)
To be sure, there was also some short covering in last week’s rebound. According to Dow Jones, coal stocks surged 23.4% in the week (but remain down 22% for the year). Pipelines (i.e. MLPs) advanced 14%. Shipping stocks were up 8%. There were also pockets of strength in other subsectors that have recently faced big losses.
Although we may quibble with the composition of last week’s rebound, it is most important that stocks ended higher. Any advance is good because it breaks the downward momentum and can set the stage for a more broadly based rebound later on.
I still remain hopeful that the stock market will find its legs and mount a more meaningful rally before too long. (How long it will last is another matter and a potential topic for a future post.) The January sell-off has, however, given the stock market a much steeper (technical) hill to climb.
January 25, 2016
Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1543
Linden, New Jersey 07036