There are 10 things that stock market investors ought to watch out for in January.
First, let’s build the requisite background with the help of two charts.
For the sake of transparency, both charts were previously published and no changes have been made.
Note the following:
• From the first chart, the first target for the stock market is Dow 30,000 points, and the second target is over 32,000. Dow 30,000, during Trump’s first term, has been the longstanding target given by The Arora Report.
• To wit: When I gave a “buy” signal on Donald Trump’s election at a time when many were predicting a big stock market drop, it was at first met with incredulity. When shortly thereafter I called for a high-probability scenario of the Dow Jones Industrial Average hitting 30,000 points in Trump’s first term, I received a ton of hate mail. I have subsequently repeated that call several times. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”
• The first chart shows that the stock market was overbought about a month ago but there was room to run. To determine overbought and oversold conditions, the relative strength index (RSI) is the best indicator for a number of reasons. However, in addition to the science of using RSI, it is also an art that investors ought to learn. In general, in trending markets, overbought markets often become more overbought.
• There is one striking aspect in which the present-day stock market is similar to that of 1999.
• As the second chart shows, in 1999, the stock market was primarily controlled by the momo (momentum) crowd. And 20 years later, in 2019, the stock market is primarily controlled by the momo crowd again.
• Nobody wants to talk about the momo crowd because it is not in the interest of the establishment. The stock market is going up not because of higher earnings, not because the economy is getting significantly better and not because valuations are low. Buying in the stock market is occurring simply because it is going up. If analysts were to admit this simple fact, there would not be much need for their seemingly sophisticated analysis.
• The second chart shows RSI divergence. In plain English, it means that as the stock market has risen, internal momentum is not keeping pace. This is a reason for caution.
• The second chart shows that volume is low. This indicates a lack of conviction in the rally. This is another reason for caution.
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The 10 things to watch
Now that you have developed the requisite background from the charts, it is easy to understand the 10 things for stock market investors to watch in January.
• The January Effect will be in play. The January Effect can often generate as much as a 30% return in a short time. Please see “How to take advantage of the January Effect in the U.S. stock market.”
• New money pours into the stock market in the beginning of the year. Such money tends to drive the stock market higher.
• The stock market was very strong in 2019. For this reason, many investors held off booking gains in 2019 to defer taxes by one year. Such investors may start selling in January putting downward pressure on the market.
• The release of fourth-quarter earnings is ahead. There is a lot of optimism about the earnings. The consensus is that earnings bottomed last year and now are on an upswing. There is a fairly high probability that the consensus may be wrong.
• A large amount of economic data will be released this month. At The Arora Report we follow economic data from 23 countries. It is no longer enough to watch the data only in the United States. Investors are optimistic and the consensus is that economies across the globe are rebounding.
• Bears are gunning for a stock market decline in January. If a drop does not occur, expect a short squeeze exaggerating a move to the upside.
• If the stock market does not fall, expect FOMO (fear of missing out) to take hold with investors throwing money at ETFs without any other analysis. Investors are also suffering from recency bias. Please see “This 25-year stock market chart shows investors are under a spell of bullishness.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.