Moat Market Intel: What Happens in February after a Tough January Market?

Moat Market Intel: What Happens in February after a Tough January Market?

This 2022 didn’t start off on a positive note.

If you have fully invested in the STI ETF, you would have fared better but if you invest in REITs fully, your portfolio would have felt the pressure.

The S&P 500 and Nasdaq were down a fair bit in January. The magnitude of the drawdown was not surprising. The surprising part was that seasonally, January tends to be a month that you could not miss being invested.

The volatility of this period seriously made me remember about 2017 and 2018. 2017 was kind of a pinned market, in a similar fashion as 2021 and 2018 started off with a lot of volatility.

This post was originally posted here. The writer is a veteran community member and blogger on InvestingNote, with a username known as @Kyith.

What was similar in 2018 was that the Fed attempted to tighten a few rounds and eventually the market seemed to not take the lack of liquidity so much that eventually, they relented.

Would this time be similar? I am not sure.

Here are some of the data that came across my desks recently.

What happens after an ugly January market return?

I have been seeing a few of these selections of SP500 with big drawdowns and how they did for the rest of the year. This one is from @FrankCappelleri over at Twitter.

The more I tried to understand all these volatility and options market maker flow stuff, the more I felt that all this stuff is less of a coincidence.

This table shows that usually when there is a poor Jan, on average we don’t snap back in February. But you can see that there are some years where they do. 2016, 2009, 1935 and 1968 were some of the more positive years.

Ryan Detrick at LPL financial let us know that for the past 20 years when we have a down January, the final 11 months have been largely positive (except for that 2008 period).

All these stats do not help much if Jeremy Grantham’s super bubble scenario played out.

We have 2 big up days at the end of the month and Ryan’s data show that when that happens, on average, the next month wasn’t so rosy.

10% or Greater Corrections are More Common Than We Think

Before the 2-day big rally, we flirted really close to a 10% correction.

This 10% correction somehow feels worse for a lot of people but actually, it is more common than we think.

In Market Declines are Frequent Enough to Invest a Large Lump Sum, I bring to your attention that every year, there is a drawdown. It is just how big is the magnitude.

Here is the chart again:

The stat is that the average correction is about 14% so 10% is actually less than the average.

Sarah Ponczek of UBS posted the performances of the market after a 10-20% drawdown:

Click to view a larger table

Throughout the years, 10-20% corrections on the S&P 500 are pretty common and the returns in subsequent months were pretty good.

However, I do find it odd that there wasn’t much data before 1943. Does that mean there weren’t any 10-20% corrections? I don’t think so. Not sure if this is some data mining operation.

Seasonal Midterm Year Performances

After my mid-term year post, Ryan provides greater clarity on the average mid-term year performance:

For those who are not aware, 2022 is a mid-term election year over in the US. On a seasonal basis, the performance profile seemed to be different.

So a down January is not abnormal.

But when I look at this seasonable chart, I can understand why some would say if you have made good money in the past two years, maybe it is not such a bad idea to sit this year out (and come back the next year).

Sentiments are pretty negative at the moment

We enter the year with so much negative news of interest rate hikes, inflation, a high market valuation that sentiments were pretty bearish.

A lot of the charts were based on the bullish and bearish survey done by the AAII in the US. Since 1987, they have been surveying their members every week in their own way how bullish or bearish they felt.

The chart above shows the bull-bear spread for the past 10 years. It is quite safe to say sentiments are pretty bearish.

This bull-bear spread can be seen as one of the contrarian indicator.

LPL Research showed the frequency where we were this bearish in the past 34 years. Extreme bearish and bullishness have rather low frequency and the average S&P 500 returns when its bearish tends to be better.

Here are two charts where they overlayed the survey against the stock market. The bottom one over a longer time period.

We even have the customary bearish magazine cover!

The chart above shows the % of securities down by 50% or more from their 52-week high. This is a market breadth indicator.

If more stocks are down, buying means going against the trend, but over a longer time frame, this tends to be buying nearer to a market bottom.

However, not all markets behave the same way. If we zoom out and take a look at 1999 to 2002, but when so many stocks are down may endure you to two years of agonizing drawdowns.

Here are the number of stocks in the S&P 500 above their 50 and 200 day moving average respectively:

Breath is depressed but not as bad as 2018 and COVID lows.

We were briefly below the 200-day moving average on the S&P 500.

@SethCL on Twitter let us know that if we break below the 200-day after being above it for the previous 20 days, here is the performance.

I think with yesterday’s move, we should be above that.  even on a 6-month basis. This table takes out a lot of the volatility that you will experience in the 12-month.

Zerohedge put out this chart on the put option volume on the US-listed index. I think many people didn’t realize how illiquid the equity market is and how much the options market have become the price setter most of the time. This is a bigger deal than how big passive indexes now own stocks (to be fair the passive indexes reduces the liquidity in the market in some ways. Do read Corey Hoffstein’s liquidity cascades)

I dunno what to make of this. It feels that this market is very different from the equity market in the previous decades.

Once again, this article is a guest post and was originally posted on @Kyith‘s profile on InvestingNote. 

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