We are in the middle of a 9-month bull market since the Covid19 correction that occurred in March of 2020 with the market being propelled by favorable trends such as: vaccine releases with positive efficacy rates, further Federal Stimulus passed in late December, and the Federal Reserve stating that interest rates will remain low until 2023. The story for the last few months has been that companies earnings should boom in 2021 as Americans are waiting to get out and party! But are some hidden market technical indicators hinting at a different story in the short term?
One of our favorite technical indicators to measure the S&P 500’s direction is the relative strength index (RSI). Recently the S&P 500 printed daily and weekly RSI levels above 67 with 70 being the alarm bell for overbought conditions. While the underlying stories that have driven the market out of the Covid19 correction are still true, perhaps the market is more forward looking than we think.
New risks on the horizon are the Georgia Senate seat run-off election taking place January 5th. The expectations are that the Republicans will hold one of the seats ensuring a split house and senate for the newly elected Biden presidency. But if this seat is taken over by the Senate, many are speculating the market will falter or show some jitters for a while until we can digest how many changes to tax policy the Biden presidency will be able to easily pass.
Besides the Senate run-off the market is facing tax gain harvesting after some traders and hedge funds reaped huge gains in 2020 considering the market rallied over 40% from the lows. Traders who have large gains will be incentivized to wait until Jan 1 to sell their winners, delaying their tax bill until April 15th of 2022. This seasonal selling pressure is generally shaken off by larger market sentiments however the start to this year is by no means average. Historically, the first 5 days of January is a decent predictor of year end returns for the market.
“If the market is higher in the first five days, history shows the S&P 500 has been up 82% of the time for the full year with an average 12.5% gain, he notes.” - CNBC article
The dubbed ‘January Barometer’ will be something to watch, paired with the Senate election and RSI indicators. Due to these factors and the relatively favorable returns experienced since the Spring of 2020 we could take a more cautionary tone in our investment stances as the risk reward currently does not seem compelling at current market multiples.