January Theories Backed by Strong Technicals

Written by: Eugene Peroni | Peroni Portfolio Advisors

From the start, the stock market checked several boxes this year which presented greater technical possibilities for a bullish outcome in 2023. One of those boxes was the first 10 days theory that states if the early trading days of the year are net-positive, stocks will likely rise for that year. In January, the first 10 days produced six daily rallies for a net gain of 763 points in the Dow Jones Industrial Average (DJIA). Another theory encompasses a lengthier timeframe by considering all of the first month’s trading activity. In this case, the adage is “As goes January, so goes the year.” Once again, bulls come out on top with a recorded monthly advance of 2.83% for the DJIA (the S&P up 6.2%). One indicator with an even longer history is the Dow Theory which states, in essence, that when the Dow Jones Transportation Index leads the DJIA higher, a recovery is more likely to be enduring. Transports recently led industrials by about 1,000 basis points year to date.

The above-referenced theories might not provide anything more than academic talking points without the appealing bottom-up technical qualities the market has produced so far in 2023. With improving recovery characteristics among technology categories and other growth themes, the market’s leadership footprint has widened. This could mitigate general market vulnerability in the event certain groups rotate into consolidation. Broad and diverse sector participation has been a prevailing hallmark characteristic for more than two decades and has been attributable to the market’s durability and elasticity through myriad headwinds on economic, monetary and geopolitical fronts.

While the Nasdaq has trounced the performances of other major stock indices in the early months of 2023, I anticipate rotational market consolidations could boost traditional cyclicals as well as defensive growth categories such as consumer staples and health care. The market is likely to routinely police price and sentiment excesses as they occur in various sectors and themes. Sectors such as industrials and materials/metals could make positive relative strength strides amid this process. Traditional cyclicals are represented by a significant number of individual stocks exhibiting positive accumulation patterns. Concentrations of these attractive stocks are found in such sub-categories as aerospace/defense, agriculture, auto parts/equipment, industrial materials, manufacturing, specialty alloys and steels. Separately, it is also noteworthy that small and mid-cap stocks are substantially outperforming the S&P 500. This may underscore rebounding investor confidence following last October’s lows. It is our contention that a formidable base was established in last year’s fourth quarter which could launch the major indices to still higher levels this year. It is always intriguing when positive market behavior contrasts with disconcerting current headline stories. This may be a sign that the market’s focal point is extending toward a horizon beaconing burgeoning economic growth.

Related: The Collapse of Silicon Valley Bank Rocks Banking Sector: Three Takeaways