Alert: Bulls Should Be Careful Despite an Impressive January

It’s amazing how resilient the equities market has been in spite of the concerns toward the budgetary cuts and debt ceiling, the eurozone’s stalling and debt, and the earnings risk.

The current equities market has some bull legs; it could advance higher, driven by more encouraging earnings and economic news, which has been positive.

The U.S. equities market has been trending higher. About 75.1% of U.S. stocks are above their respective 200-day moving averages (MAs), versus 67.8% a month earlier. On a short-term basis, 82.1% are above their respective 50-day MAs, versus 80.4% a month earlier. A note of caution: only 67.2% of U.S. stocks are above their 20-day MAs, down from 86.2% a month earlier. This may signal a potential reversal or continued stalling in the equities market, based on my technical analysis.

The month of January was excellent for the equities market, with some impressive gains recorded in the blue chips and small-cap stocks, which bodes well for the rest of the year, based on the “January effect.” In 1954, the S&P 500 advanced 5.1% in January and was up 45% when it closed for the year; albeit, there have also been some poor showings following a positive January. The S&P 500 has edged higher in the past three straight months, a best for it since 1987 (but you know what happened in October of that year). But be careful, as the S&P 500 may be approaching its third top, after its first top in 2000 and second top in 2007.


$SPX S&P 500 Large Cap Index stock market chart

Chart courtesy of

Take a look at the upward move of the S&P 500 stocks above the 200-day MA, which is over 87% as of January 31, versus the 47% level in mid-November. Be careful, as the pattern has been that stocks will inevitably move back toward their moving average.

Chart courtesy of

The big winner in January was small-cap stocks, with the Russell 2000 blasting above 900 to a record historical high, up 6.2% in January. I still feel small-caps will outperform in the equities market this year, as long as the economy continues to show signs of growth (read “How to Supercharge Your Portfolio”); I recommend adding some of these stocks to help drive up the overall gains in your portfolio.

The chart of the Russell 2000 shows a breakout at the horizontal blue resistance line, coupled with rising relative strength and a moving average convergence/divergence (MACD), as shown by the blue circles on the chart.

Chart courtesy of

Blue chips were the second best group in the equities market as some safe money moved to the stalwarts of the U.S. and global economies, when the Dow Jones Industrial Average advanced 4.8% in January.

The tech-laden NASDAQ was the worst performer in the equities market despite a 4.1% gain in January. But I continue to like technology as we move forward, especially those stocks with a focus on mobile.

One thing’s for sure: we know that the rate of the January advance in the equities market is clearly not sustainable, especially as we move into February. The November to April period has historically seen the biggest gains for the Dow and S&P 500, according to the Stock Trader’s Almanac. Technology has been better, with stocks advancing in eight months from November to June.

So, while the current market bias is bullish, you also need to be careful and make sure you take some money off the table. Better yet, have some put options in place.