2018 Starts Off With A Bang
The stock market is looking like it’s about to do the impossible, have a repeat performance of 2017 which was in the 99th percentile in terms of risk versus return. The first two days have been great. In the S&P 500, the first two days of 2017 were up 0.85% and 0.57% and the first two days of 2018 were up 0.83% and 0.64%. The closeness of these results is probably a coincidence, but it’s notable. On Wednesday, the S&P 500 hit another all-time high. The VIX was crushed as it fell 6.35% to 9.15. The chart below shows the historical two day movements in the Nasdaq 100. As you can see, this is third best move in the past 1.5 years. The stock market is extremely overbought. I expect a selloff next week as all traders come back to work. The CNN Fear and Greed index is at 67/100 which means greed. Since the year has started off good, the stats on winning streaks to start the year have come out. The longest positive streak to start the year is 7 days which occurred in 1976 and 1987.
As someone who focuses on macroeconomics and the fundamentals of corporations, I’m not one to go by Wall Street adages such as ‘sell in May and go away’ or the fact that January’s performance predicts what the rest of the year is going to look like. That being said, the Santa Clause rally did occur last year and the chart below shows January’s prediction record is solid. As you can see, January’s return buckets perfectly align with returns in the next 11 months, dating back until 1971. With the first two days in the books, the month is looking like it will be positive. As I said, I think the market is due for a selloff next week, but I can’t include a prediction in that analysis. The other factor which might affect stocks in the next few days is the winter storm. Home Depot stock was down on Tuesday, but it was up 0.52% on Wednesday as the storm approaches. The repair firms will be helped and the retailers will be hurt if the storm, which will impact the east coast, is bad. The economic data will be worthless in January if the storm hurts results.
