Yesterday, Bank of America's technical team was kind enough to show that in the background of the dramatic intraday volatility, what the market has experienced in recent weeks has been a significant period of wholesale distribution: a concerted, behind-the-scenes offloading of risk by major market participants.
Today, we look at the market from a different technical angle, namely the calendar effect of both the infamous "as goes January...", as well as in the aftermath of what historically is the strongest 3-month period of the year for capital markets, the time from November - January.
As BofA's Stephen Suttmeier notes, Nov-Jan is the strongest 3-month period of the year, but…
November-January is the strongest consecutive 3-month period of the year. During this period, the S&P 500 is up 66.7% of the time with an average return of 3.35% going back to 1929. November 2015-January 2016 is down 6.50%. The S&P 500 has not followed this bullish seasonal pattern and is on a pace to have the eighth weakest November-January going back to 1929. January 2016 is down 5% on a pace to be one of the worst January going back to 1928.
…a down Nov 15-Jan 16 does not bode well for 2016:
Data going back to 1929 suggest that well-below average annual and February- December price returns follow a down or below average November-January. When the S&P 500 is down between November and January, the year is down 55.2% of the time with an average drop of 1.50%, while February-December is up 62.1% with an average rise of 0.91%. When November-January is below average, the year is down 55.0% of the time with an average drop of 0.40%, while February-December is up 57.5% of the time with an average rise of 1.44%. These are well below the 1929-2015 average returns of 7.09% for the year and 5.77% for February-December.
January is typically a bullish month but not in 2016
Seasonal data going back to 1928 suggest that January is typically a bullish month. January is the fourth best month of the year with an average return of 1.19%. January 2016 is down 7.37% MTD and bucking this bullish seasonal pattern.
January Barometer set up for bearish signal in 2016
Barring an S&P 500 close today above 2043.95 (December 31, 2015 close), 2016 will begin with a down January. Going back to 1928, the year is down 57.6% of the time with an average decline of 1.82%, while February-December is up 57.6% of the time with an average rise of 2.10%. This is also a combined first five days of January down andmonth of January down signal, which has occurred 18 times since 1928. After this combined weak signal, the year is down 61.1% of the time with an average drop of 2.21%, while February-December is up 50% of the time with an average rise of 1.54%. These are all well below average. See our Chart Blast: 11 January 2016 for more on the January Barometer.
Combined Jan & Nov-Jan Barometer is bearish for 2016
When both the November-January period and the month of January are down, which has happened 20 times going back to 1929, the S&P 500 is down 65% of the time with an average decline of 4.72%, while February-December is up 60% of the time but shows an average decline of 0.27%. Having a down January appears to magnify the downside risk after a weak November-January period.
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And while all of the above calendar effects clearly hint at further market weakness and bearishness, never prior to 2008 in the history of the "January effect" or any other calendar effect, did central banks go "all in" on proping up stocks with QE and, as was the case last week, with desperation such as the BOJ's NIRP, making a mockery of all technical analysis and self-fulfillling chart propehcies.
In retrospect, this time it really is different, and one can comfortably throw away the trader's almanac at least until we find out just how this doomed experiment in central planning ends.