4 Signs a Stock-Market Selloff in February May Be on the Cards, Analyst Says
U.S. stocks on Monday descended significantly for the first time in the Donald Trump postelection era that delivered a multimonth shot in the arm to equity investors.
There are signs that stocks, which have risen on hope that the new president would unfurl a slate of policies favorable to Wall Street, may see a healthy downturn from recent records.
On Monday, the Dow Jones Industrial (DJIA), S&P 500 (SPX) and Nasdaq Composite Index (COMP) all registered their worst daily drops in weeks and Monday’s decline could be a harbinger of more weakness ahead, according to market technician Jonathan Krinsky, a top analyst at MKM Partners.
Doubts about Trump’s legislative focus and policies, that have tended to garner more jeers than cheers, are starting to significantly erode momentum from a record-setting climb. The major indexes had been hovering around all-time highs as recently as Thursday, highlighted by a push to psychologically significant level of 20,000 for the blue-chip’s gauge.
Krinsky, however, in a Jan. 29 research note, makes the case that Monday’s action may not be an aberration, pointing to a few technical factors that support the notion of a downturn that could see the S&P 500 index shed about 5% of its value, bringing it to about 2,180-2,190, marking the broad-market gauge’s lowest levels since around November.
1. Seasonality
Most notably, February tends to be a seasonally weak month for stocks over the past four decades. That trend is magnified in postelection periods, falling about 1.85% in the years following a presidential election, Krinsky noted.
2. Days without a 1% pullback
There have been 75 sessions (including Monday’s action) without a 1% drop in the S&P 500 index, which marks the longest such streak in about 11 years, according to Krinsky. A period of sideways trading tends to suggest that the market has pent up momentum. And if history is any gauge, momentum may be leaning toward a downturn, given the market’s tendencies in February.
3. Fear is a factor
A measure of Wall Street fear has been hovering around its lowest levels since about 2014, even as stocks soared to records and as Trump’s tough-talk on trade and immigration gave investors plenty of reason to be invest cautiously. Readings of the CBOE Volatility Index VIX, +12.29% of around 12 tend to imply complacency by the market while those of 20 indicate that the market is betting on a swing in prices to occur sooner than later. Monday’s sharp move pushes the “fear” gauge to 11.88—still very low by historical standards.
4. Bearish bets
MarketWatch’s Joseph Adinolfi reported in mid-January that options bets that the market would tumble in February were on the rise. Those bets imply that many investors are bracing for a big selloff in February.
Rising political uncertainty also has been increasingly cited as one of the biggest concerns for markets and that may be hard to price in the era of Trump.
All that said, Krinsky still sees a downturn as a buying opportunity for investors. So, he’s expecting that any sizable retreat will be met with a rally that could take the market higher before these 2017 gyrations end.
Investor takeaway: To be sure, the equity market could power through February with nary a blip lower, especially given all the “animal spirits” that have been at work in markets lately. Moreover, stocks have climbed precipitously since the Nov. 8 election, the Dow has gained roughly 9% since that point, the S&P 500 has risen 7.3%, while the Nasdaq Composite has climbed 8.1%—despite Monday’s pullback.
Still, it is sometimes worth knowing how some market participants are positioning themselves.
Courtesy of MarketWatch