The January slump for the equity markets has been downright painful to watch. All major indices posted losses for the month of January. Russell 2000 is down more than -9%, Nasdaq is at a negative -8.9%, and S&P 500 is more -5% to start the year. Across the key sectors, only energy has been pushing higher. And just last week, we mentioned that there were signs in the chart data suggesting a bottom was forming in the market. In fact, BullGap's Momentum Market Timer (MMT) fired a BUY signal on 1/28/2022 suggesting that a near to intermediate bullish move was coming.
Big Picture
The week started off with a continuation of the late-day rally on January 28th and all major indices posted positive gains. Tech stocks which have topped since the beginning of January rallied for the first part of the week to over +6.5%. Smallcaps hit over +6% in 3 days. Markets were due for a little downside as you can see below prices rallied to hit the 61.8% fib level before turning over. Nasdaq closed out the week +2% while S&P 500 wrapped up the week +1.5%.
Market Breadth
Even with the week's rally, market breadth overall is still soft. There is still a good percentage of stocks below their 50 EMA and 200 EMA. The near-term 5-day to 10-day ratio is moving in the right direction. There is still uncertainty with the data and volatility is still par for the course next week.
Market Sentiment
According to Bullgap's market sentiment gauge, investors have moved from "Extreme Fear" to "Fear". As we mentioned last week, we were expecting the fear gauge to move higher this week. Reading in the low 20s usually does not last long in a bull market. It has occurred only a few times in recent years and usually, we see a surge in market sentiment into the bullish side once it is struck.
Bonds Market
With the Feds and rate hikes making all the news, we wanted to take a look at what the bonds market was telling us. Clearly, from the chart below, TLT has been in a downtrend. In fact, the overall reading for TLT has been bearish with major support being broken on 12/7 and on 1/3. Recently, TLT has a look of a potential bottom that has been struck. Though there is still downward pressure on the bigger timeframes, the intraday data is suggesting some support has been laid in. Is the market telling us something? Are investors seeing the soon-to-be-raised interest rates to be nomial to the market? Last Friday, TLT did break below 140 which suggests that there is potential for it to move lower to the March lows of 2021 (134 to 135 support region). However, it may be worth monitoring this closely as TLT has the potential to rally off this base.
Market Outlook
January has been a challenging month for the equity markets. Chief among those has been the looming rate hikes discussed by the Feds and the eventual end of quantitative easing (QE). Additionally, the rally off the March lows of 2020 has pushed markets into a high evaluation. As we discussed many times in our blogs, this dip is a sign of a healthy bull market. With technical signals normalizing back to the selling territory, the bulls have the upper hand now coming into February.
SPY
SPY has rebounded to push higher to move above its 200 DMA. Having hit a textbook 61.8% retracement off the late January low, it looks to be making a higher-low.
QQQ
QQQ rallied early this week to push above its 200 DMA. However, that was short-lived as it could not break into its upper resistance level. It is still sitting below its 200 DMA.
IWM
IWM was able to start off strong early in the week. However, it came up against its resistance of 200 regions. Small caps are a barometer into the US market and it will be foretelling to see how IWM behaves in the next couple of weeks.
Concluding
The major indexes have a look of making a higher low next week. With prices advancing above key areas, it will be interesting to see how it behaves next week. A dip and a strong rally into the week may have the markets set up to test the 50 DMA sooner rather than later.