Patiently waiting… the market continues to trade in a sideways channel.   The market action has been neutral as it digests all the ongoing news.  In some respects this is good, but then again the market’s upward momentum has stalled.   We continue to believe the market risk outweighs any potential missed market gains and sit with low exposure to equities.  We need to see the market breakout of its channel to the upside with strong market internals before adding to our exposure, so we wait.

Data Source: Yahoo Finance

On another thread, someone posted several years where the market had a down January and yet the year’s returns ended good.   Some of the years presented were bear market bottoms where the market bounced off its lows during the year and ended higher.  Since we are not in a bear market, I decided to expand on the concept.  To put negative Januarys in historical context, I broke them down into 1) Bear Market Bottoms 2) Continuing Bull Markets 3) Bull Market Tops in Secular Bull Markets 4) Bull Market Tops in Secular Bear Markets and averaged the year’s returns.

1. Bear Market Bottoms (1982, 2003, 2009, 2010) averaged a 19.4% positive return
2. Continuing Bull Markets (1956, 1968, 1984, 1992, 2005) averaged 3.8% with 2014 being the exception ( 13.8%) thanks to extreme monetary policy
3. Bull Market Tops in Secular Bull Markets (1953, 1957, 1962, 1977, 1981) averaged -10.8%
4. Bull Market Tops in Secular Bear Markets (1969, 1973, 2000, 2008) averaged -19.3%, then continued to decline to an average loss of -47% for the entire bear market.

If you are inclined to use January as a barometer, then the best case is we are in a Continuing Bull Market that averaged 3.8% with the exception of 2014.  But we also have indications that a market top could form this year and then you have to decide if we are still in a secular bear market or a new secular bull market.   I have strong opinions that we are still in a secular bear market since we did not come close to the conditions that define secular bear market bottoms in 2009.  In either case, one needs to adjust allocations for the increasing risk.

But what makes this year’s January decline more remarkable is it was a pre-election year.  Not one of the years listed above was a pre-election year.  As a matter of fact, out of the 48 months in the four-year election cycle, the pre-election January has the highest average return at 4.3%.   Since 1951, the S&P 500 index pre-election January has had a 15-0-1 record with 2003 being the one loss (-2.5%).  And 2003 was in the middle of a bear market.   The incumbent politicians had better get their act together if they want run on a strong economy.   But then again with the current administration beginning to tout the strong economy, it might be the first sign of a top.

Categories: TSP Charts