Three charts tracking impending doom | a cautious investor

Okay, I was literally trying to come up with the most bearish headline possible. But to be clear, I actually remain optimistic about the long-term structure of this market. I learned when my market trend model was bullish. Over the long and medium term, the main trends remain positive. And that’s not a judgment call. This is true based on the trend defined by the weekly moving average.

But right before the holidays I became extremely happy and couldn’t ignore reading widely., which tends to coincide with meaningful market highs. It’s not necessarily a “the world is ending” type of top, but it’s definitely a “you might want to wait and see how this plays out.” It is a type of tower.

2024 has started off tumultuous for stocks so far, with growth sectors giving back some of their December gains.

Should we be surprised by the early downturn in the new year? And what warning signs should we be prepared to anticipate deeper and more sustained adjustments?

Seasonal trends hint at weakness in the first quarter

The reality is that this kind of early weakness in January is actually pretty common in election years. Editor Jeff Hirsch Stock Trader’s AlmanacThis seasonal pattern has been resolved. Recently on my show. And StockCharts’ seasonal charts tell the same story.

If you look at the last five years of election cycles, you’ll see that the first quarter is actually the weakest three-month period. The S&P 500 has fallen by about 1% on average in the first three months of the year, with declines in two of the last five observations of the month.

October may also be of interest, as it is almost always a down month with an average return of -4.3%! But we’ll find out about it later this year. Going back to the current market, we noticed a significant sell signal registered this week.

Major short-term breadth indicators turn bearish

The McClellan Oscillator examines changes in pre-decline data to produce a momentum indicator for breadth, which is a type of RSI for market breadth. And this week’s price decline has pushed this indicator below the zero level.

The chart is colored green when the McClellan Oscillator is above zero and colored red when the indicator moves below zero. Looking at the general trend of the S&P 500 Index (bottom panel) in the green and red areas, we can see why further declines are expected due to recent sell signals.

So now we have a weak seasonal pattern relative to the average election year, and the confirmation of the breadth terms is also starting to decline. So what charts can help us confirm that this is not just a brief one-week decline, but a potentially more sinister decline?

Volatility Can Bring Confirmation

When markets rise, volatility tends to be lower. This is because investors are generally completely scared and don’t buy aggressively. They tend to accumulate positions over time. But when things get low, the panic takes control and we aggressively hit the sell button to appease our fears. This is why volatility surges in bear markets, and why the VIX could be a good chart to follow in January.

This week’s sell-off pushed the VIX from just above 12 to just above 14 in just five trading sessions. The rally off the October lows has been a typical slow and steady low-volatility uptrend, taking us off the lowest levels in several years. So, if VIX gets above 14 or 15, we’re likely to see the seasonal trend of an election year playing out before our eyes.

I love following seasonal trends and other cycles. Because it can provide a “base case” for the market based on what typically happens. But will 2024 follow this typical seasonal pattern? A further decline in the breadth indicator would corroborate this claim, while a spike in volatility would suggest that risk aversion may be the best option for investors in the first quarter.

RR#6,

dave

P.s Are you ready to upgrade your investment process? Check out our free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

disclaimer: This blog is written for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

The author had no positions in any securities mentioned at the time of publication. All 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.