INSIGHTS

On April 18, 2016

AAM Viewpoints - Dismissing the 2016 January Factor

The twin stock market lows of January 20 and February 11 ushered in one of the most dramatic reversals in decades. Dismal as the year started, there are burgeoning technical factors that I believe make the adage “As goes January, so goes the year” a less likely scenario in 2016. Arguably, the most substantial bullish characteristic is one that has endured throughout most of this market cycle – broad and diverse sector participation. Following the early February lows, most commodity categories rebounded with strong relative strength behavior. The recovery of the beleaguered commodity complex was bolstered by significant strides in the Dow Jones Transportation Average (DJTA) which moved ahead of the industrials in year-to-date performance after February 8 and has held a consistent, significant lead since. And, it is important to note that the rallies in metals and materials did not incite a speculative migration from the market’s core leadership categories such as consumer discretionary and staples, technology and health care. Instead, commodities added to the market’s plump roster of sector leaders. Broad and diverse sector participation is an indication that the advance has not driven undue concentrations of capital into a single industry category or micro theme. In other words, there is no evidence the market is in danger of moving to a monochrome focus similar to that which ultimately led to the infamous technology bubble of 2000.

While the Dow Jones Industrial Average (DJIA) has sported a greater-than-15% rebound from its February lows, I believe there is a reduced risk of a serious correction before new record highs are established. My reasoning is based on the quality of price formations in many individual stocks representing the durable and elastic sector leaders. Here, I am observing many “cup and handle” price formations that, unlike “V-type” patterns, tend to indicate sustainability and longevity of a trend. These are not reactive movements, but well-plotted base formations resulting from what is likely an improvement in investor psychology and renewed longer-term buying conviction. These formations are further complemented by non-institutional positive net money flows that suggest astute buyers anticipate a more vibrant economy on the horizon. Institutional buying often follows, giving stocks an important boost that may present exciting breakaways to higher levels.

Another bullish development is West Texas Intermediate crude oil (WTI), which crossed above its 200-day moving average for the first time in 21 months on April 12. This becomes a more meaningful move with the gains in metals and other commodities and augers well for the outlook of improving supply/demand ratios in petroleum-based products.

As the DJIA approaches the 18,000 level, correction becomes increasingly possible. However, retreats are more likely to be defined as short-lived events limited to perhaps 3-5% retracements. With investor confidence apparently growing and with the market cycle in its advanced stages, I believe it is most important to focus on the longer term. It may be that the biggest risk now could be selling the leading stocks and sectors too soon, in my opinion.

CRN: 2016-0401-5246R

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