As the first week goes, so goes the year 75% of the time since 1929.
PRE-OPEN MARKET COMMENTS WEDNESDAY – The first trading day of the year started off on a positive note and that enthusiasm died after the first 15 minutes. Sellers flexed their muscles and the gap reversal was underway. The up trendline that connects the low from October 13th to the low from December 22nd was tested and it is critically important. When that support level is breached I believe we will see a drop and I am expecting it this week.
The market limped into year-end and that is a bad omen for 2023. Seasonal strength is typically very strong and Asset Managers are eager to “prop up” the market on light volume so that management fees are higher. When the market can’t finish the year on a strong note, it is a sign that sellers are taking advantage of the year end bid while it lasts. The bounce that started in October featured mixed overlapping candles and light volume. That is a sign of weak trend strength. In December the SPY tested the downtrend line that started a year ago. The market was slapped down from that breakout attempt and it quickly fell below the 200-day MA, an up trendline and the 100-day MA. This is very soft price action heading into year end.
We don’t need to get into the “weeds” with fundamental analysis. Interest rates are moving higher, the yields curve is inverted and the Fed is steadfast in taming inflation. Today the FOMC minutes will be released. I am not expecting anything new, but it will be a cold splash of water. Sellers who were passive into year-end will be more aggressive now that season strength has passed.
China has been the global growth engine for decades. If you remove that demand, where’s the next catalyst? England, Europe, Japan, Korea, Australia? Not likely. All of those countries are struggling because much of their growth has been tied to China. The same is true for US companies. Tesla and Apple get 23% of revenues and 17% of revenues from China respectively. Goldman Sachs is projecting GDP growth of 1.8% in 2023 for China. That is a far cry from the high single digit growth we are used to.
Here’s an interesting statistic. As the first week of the year goes, so goes the year. When the S&P 500 is up during the first 5 trading days, the market has rallied 75% of the time finishing (11.9% average gain) since 1929.
Longer term swing traders; I still believe we have some downside. We are going to wait for market support. If you choose to short this market, you have to be nimble because the snap back rallies are violent. That is why I suggest you stay in cash.
Day traders, I am favoring the downside. If the early gap up fails, we could have the momentum we need to test the algo line. That is a key level. Unless we attack it aggressively during the day, I would not get cute near the low of the day from Tuesday. A more likely scenario is that the market chops around during the day. It is very news driven so we are likely to fall into “wait and see” mode. The FOMC minutes might spark the selling we need to penetrate that level. If we close below the uptrend line, you can take short term bearish swings.
Support is at SPY $377.80 and resistance is at $386.40