Overall market performance is tracking closely to President Trump's first term as Wall Street tries to assess the impact of tariffs on earnings. The markets will complete that assessment soon, and they will rally once the outlook becomes firmer.
The sentiment chart has been updated, showing that bearish sentiment reached even more profound levels of negativity and is more than two standard deviations below the norms.
Last week, we discussed that continued bullish exuberance and high levels of complacency can quickly turn into volatility. Over the previous week, the market fell sharply following news of a potential viral outbreak in China and more concerns about tariffs from the Trump Administration. While those were the headlines that gained the market's attention, the reality was that the market was overbought and on a sell signal, setting the market up for pullback.
Last week, we discussed that continued bullish exuberance and high levels of complacency can quickly turn into volatility. As we noted then, introducing an unexpected, exogenous event can soon lead to a price decline if investors begin to reprice forward expectations. On Friday, that unexpected event presented itself when China, and most notoriously, the Wuhan Lab, reported the discovery of a new coronavirus in bats.
On Thursday, the market broke out of the bullish consolidation over the last few weeks, successfully retesting and holding support at the 50-DMA. Notably, the bullish trend remains intact, and retail investors continue to pour money into the market, with money flows reaching typical peak levels. With the market elevated, downside risk over the next few weeks will likely be contained to recent January lows. What would cause such a correction is unknown, but if money flows begin to reverse, such will likely provide the evidence needed to rebalance risks accordingly.
With Friday's close, the market turned in a positive month despite the "DeepSeek" shock to the markets this past Monday. As noted by Stocktraders Almanac this past week, the January Barometer sets up a more bullish view of the year's outcome.
The rally leading up to and following the inauguration pushed markets back to all-time highs. While the month is not over yet, the return of bullish sentiment bodes well for the market to finish the month in positive territory. Furthermore, the current rally is being supported by positive earnings announcements, improvement in sentiment, and, most importantly, a return of share buybacks.
As of 11 a.m. CST Friday, the market broke above several resistance levels, including the 20 and 50-DMA and the downtrend resistance from the December highs. That technical bounce and break of the downtrend clears the way for a potential retest of those market highs. Furthermore, on the bullish side of the ledger, that technical bounce has reversed the MACD “sell signal” and improved overall relative strength, which should support a rally into next week.
Before we reach the full month of January, the market must pass the first five days. As of Wednesday, which concluded the first five trading days of January, that market did generate a positive return, rising about 0.62%. As we noted last week, this is the first of two "January Indicators" that have historically, on average, set the tone for the year. Since 1950, the S&P 500 has logged net gains during the first five days of the year 47 times. Of those 47 instances, the index ended the year up in 39 of them. That's an 83% success rate for the first five-day theory. However, don't get too excited. Of the 74 completed years since 1950, the S&P 500 has logged a full-year gain 73% of the time. That is likely because stocks are rising as the growth of the global economy continues despite the occasional stumble.