The Bull is Awake, But Will it Continue?

Weighing the Pros and Cons.

I hope that you had a good and prosperous week and you were able to take advantage of the big moves in January. Several of our “hot” strategies, including Large Cap Leaders (LCL), GEMS and NASDAQ All Stars (NQ All Stars) are beating their respective benchmarks. LCL and NQ All Stars are up over 10% YTD.

After 6%, 9%, and 12% run-up moves in the S&P 500, Small Caps, and the NASDAQ, respectively, the most important question is, “Does this positive market continue? Are we in for even better returns in the near future?

We don’t know, but we want to offer you a few different perspectives.

In this article we’ll look at:

The January Effect
5 Key Conditions That Could Stall The Market
What to Expect in February
Our Solution to Market Uncertainty

The January Effect

You may recall that in the last few Market Outlooks, we have addressed the January Trifecta… the Santa Claus Rally (SCR), the First Five Days (FFD), and a positive month of January indicates that we will see the “January Trifecta.” This signals that we are on much better footing with a high chance of a positive year. See the chart below, which was also posted in a previous Market Outlook:

As goes January, so does the year. Since 1950 with only 7 exceptions over 72 years, when January’s performance (S&P 500) has been positive, the whole year has been positive.

As you can see from the chart below from Ryan Detrick at Carson Research, January is the best performing month, and even more so in Pre-Election years.

We are in a “Risk-On” positive environment.

This could last a while longer, or the markets could suddenly stop in their upward tracks just like they did 4 times during 2022. So far, the NASDAQ is on a 4-month high and looks to have the most momentum of all the major indices. Don’t forget that the NASDAQ 100 index (QQQ) was down 33.0% for 2022. So a fast rebound is not surprising.

Remember, if you are down 33%, you have to gain 50% just to get back to even. Right now, the NASDAQ has made less than a quarter of the return required to recover its 2022 losses. However, currently, the index is experiencing a much-welcomed positive bias.

When January has been up more than 5% following a down year, the investing climate ahead has been promising. See the chart below:

Investors are playing “Catch-Up.”

There’s an interesting investor mentality that we have witnessed many times in the past. In the last few months of a big correction or bear market, fear, disgust, and other understandable emotions cause investors to run to the safety of cash and “pull the plug” on some or all of their investments.

Then, as they sit on the sidelines, the market behaves more rationally and moves higher.

Nothing improves market sentiment faster than a bullish trend.

As a result, those same bearish investors begin to “reload” and move back into the markets.

We see signs of more bullish investor behavior in the repeated pattern of the market opening lower on negative news, but then by the close, the market is up on the day.

Investors (including large institutions that are aggressively rebalancing) are beginning to put money to work again.

Ironically, after a big sell-off, investors often think there is way too much risk inherent in the markets when in fact, the opposite may be true:

Will this bullish sentiment continue?

Again, we do not know. However, given the following few facts, we would still advise exercising caution and having a plan that considers the market’s downside risk.

For us (and our clients), this means utilizing a strict multi-strategy discipline which we offer through our asset management firm MGAM (more about this towards the latter part of this Outlook).

Click here to continue reading about what to look out for going forward and how to navigate the market’s inevitable future volatility.

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