With January now behind us, we note that it was a particularly negative month, with the S&P down 8.6% and the TSX down 4%. We also note the so called “January effect’ which historically suggests that when the S&P 500 falls over the month of January then it will fall over the course of the year. Since 1969, this correlation has been confirmed 32 out of a possible 39 times, or about 82% of the time. (Mirabaud Strategic)
But we must also note that in 18% of the years this correlation did not hold. A most recent example in our memory was 2003 when the market, having lost 45% over the previous two years, fell in January only to gain 26% by year end.
And now we enter February, which is has historically been second only to September as the worst market month of the year.
This morning as I write, the markets appear to be testing yet again the November closing lows. We are now within 200 points of the prior closing low on the Dow, 20 points on the S&P and about 200 points on the TSX. The question of the week and the month is whether the prior lows will manage to hold despite what will undoubtedly be another month of horrible economic data. At this point, there is just no way of telling which way markets will break.
On a monthly basis at Friday’s close, the S&P 500 was right at the closing support line which has been in tact from the prior cycle low in 2002. The TSX is still about 1000 points above that long-term support. These levels should prove pretty formidable support and if they do manage to hold this month, that could be quite constructive. If indices do not hold then we are looking at our worst-case scenario of lower, lows for this bear market beneath the 2002 cycle low and similar to the savage cyclical bears experienced during 1966-1982.
For those that have stayed invested and lost heavily over the past 18 months, each market low is like a fresh cut which tends to flush out another wave of seller capitulation. I note too that credit default swaps have been widening again the past few days, which suggests that the credit markets are not yet at ease. This too could spur another wave of extreme volatility. The coast is not yet clear for risk investors. We will continue to monitor this month’s action carefully.
Cory’s Chart Corner
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