While overall seasonality for stocks is bullish into the end of December, there is a tendency to see minor weakness from now into the middle of the month.
So if we are to see any kind of mean reversion, it probably should start soon. Other potential reversion trades include a lower U.S. Dollar Index, higher Treasury bonds (lower yields) and at least a bump in precious metals.
What has me a little, okay a lot, stunned is the performance in the past 20 years for January. I always thought January was one of the best months for stocks, but not over the past 2 decades. Using www.stockcharts.com data, there is only a 50/50 chance for a higher close in January, and the average performance over the past 20 years is -0.5%. The past 3 Januarys have all been lower with an average decline of 3.9%. That is something to think about as the whole world is now bullish, and I start seeing quotes like this: The near-term direction of the stock market seems pretty clear to everyone – it is higher. Hey maybe we just started a new bull market and its 1982 all over again. Sarcasm!
I will repeat my sentiment comment from last week with some emphasis: Overall market sentiment is unfortunately “really” stretched to the bullish side, and is in need of at least a little reset. Using sentiment at this stage of the bull market, especially when each pullback is bought aggressively, is difficult.
However, gains from here are likely to be tougher until the froth dies down.
One sentiment indicator showing a high degree of optimism this week is the CBOE equity-only put/call (p/c) ratio. On Wednesday, the ratio fell to 0.46, its lowest and most extreme reading since June 2015, a period when the market was peaking. This ratio typically oscillates between 0.5 and 0.75. This is a clear warning of some overheated, bullish activity in the options market. I like to use the 5-day average of this p/c ratio and it is not quite at levels seen before the market pulled back over the past six months.
Same Conclusion: There is an old adage: The only free lunch on Wall Street is the mid-December low. Maybe this works again and provides another opportunity to reload. Also, look for some of these markets to mean revert.
Looking out, I see the S&P 500 reaching the 2,300 to 2,500 region later this year or in the first half of 2017.
Thanks for reading.
Twitter: @MarkArbeter
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
