Concerns Mount as U.S. Stocks Enter January After Record-Breaking 2023 Rally
After a strong two-month sprint that propelled the Dow and the S&P 500 index to record highs, some portfolio managers and strategists are expressing concerns about a potential market downturn as January begins. Despite the success of the market in 2023, with the S&P 500 rising by 24%, experts worry that investors may start to take profits and lock in gains, causing the market to cool off after its significant run. James St. Aubin, the chief investment strategist at Sierra Investment Management, believes this outcome would not be surprising given the market’s recent surge.
U.S. Stocks Overbought, Raising Red Flags for Investors
Technical indicators suggest that U.S. stocks are overbought and at risk of a market correction. The 14-day relative strength index (RSI) on the S&P 500, used to gauge momentum and put recent moves into context, reached levels not seen since 2020. Although the RSI has since pulled back, hovering around the threshold of 70, which is considered the overbought territory, analysts see this as a warning sign.
Sentiment Swings from Bearish to Bullish, Signaling Potential Market Turn
The American Association of Individual Investors’ weekly sentiment survey reveals a significant shift in investor sentiment over the past two months. Investors have gone from extreme bearishness to extreme bullishness, which is often seen as a sign of an impending market turn. This sentiment swing occurred in July and October as well and preceded market downturns. The recent survey shows that nearly 53% of respondents are bullish, the highest level since April 2021, indicating a potential overextension of optimism in the market.
Low VIX Raises Eyebrows, Indicating Possible False Sense of Security
The Cboe Volatility Index (VIX), known as the fear gauge, is currently at an extremely low level. The VIX measures expected volatility in the S&P 500 based on trading activity in options contracts. Its decline below 12, the lowest since before the COVID-19 pandemic, has some experts worried. Nancy Tengler, CEO and CIO of Laffer Tengler Investments, cautions that once volatility starts to climb, investors should consider hedging their positions.
Investors Brace for January Inflation Report and Potential Stock Market Reaction
Investors are anxiously awaiting the release of the U.S. inflation report in January. The Cleveland Fed’s inflation nowcast predicts a substantial increase in core CPI, signaling rising inflationary pressures. While stocks have previously rallied on disinflationary trends, a continuation of rising inflation could dampen market enthusiasm. Larry Adam, Chief Investment Officer at Raymond James, questions whether the market can sustain its rally given these inflationary pressures.
In conclusion, while the U.S. stock market ended 2023 on a high note, there are several factors that could contribute to a potential market downturn in January. Overbought conditions, extreme investor sentiment, a low VIX, rising inflation, and lofty earnings expectations all raise concerns among portfolio managers and strategists. Additionally, political and geopolitical events could add further uncertainty to the market. As investors begin the new year, they will closely monitor these factors and adjust their portfolios accordingly.
Analyst comment
Negative news. Analysts predict a potential market downturn in January due to overbought conditions, extreme investor sentiment, a low VIX, rising inflation, and lofty earnings expectations. Political and geopolitical events may add further uncertainty. Investors will closely monitor these factors and adjust their portfolios.
