A Slower Pace

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

After a huge rally in November and December it would seem quite natural for equity markets to slow their pace in January, which they did. The good news is that the change of pace has not   presented in the form of an equally sharp correction. Instead we have seen a ‘drifting’ of sorts without a great deal of drama. Large cap equity indexes have drifted sideways to slightly higher, while MidCap and SmallCap equity indexes have drifted slightly lower. The technical term for this price action is a pennant formation. This formation is generally short-lived before new trends present themselves over the next few weeks.

Pennant formations can be advantageous for selective profit-taking. This is especially true when we are in a new calendar year and capital gains taxes are a long way down the road. Even for tax-deferred accounts such as retirement accounts it provides an opportunity to capture gains and reallocate portfolios for the coming year. This is exactly what we have been doing. Thus far in January we have taken profits in biotech, utilities, pharmaceutical, and financial sector equities. In addition, we have reduced exposure in consumer discretionary and mid cap value equity positions, profitably. It has been a good start to the year.

Our replacement positions have been income-orientated, adding intermediate-term corporate bond funds and equity funds focused on income. Small cap growth, small cap value, mid cap growth, basic materials and consumer discretionary sector funds remain in place. This strategy is designed to reduce portfolio volatility as we head into February, historically one of the weaker months of the year for equities. Since 1950, February performance has ranked 11th out of the 12 months for the S&P 500 Index, in the 9th position for the NASDAQ Composite Index, and 8th for the DJIA. Of course, past under performance is no guarantee of future under performance.

The top performing index YTD has been the CBOE Volatility Index, or VIX, up +8.03%. The higher the VIX, the higher the perceived short-term risk looking forward for the S&P 500 Index. The VIX is primarily under the control of institutional investors, who very well may be exhibiting an abundance of caution. The upcoming week we are expecting earnings reports from 23% of the S&P 500 corporations, including several that have a significant weighting in the S&P 500 index. In addition, the Federal Reserve Board is meeting this Wednesday. It is not anticipated that they will be announcing any changes in short-term interest rates, but their remarks will be closely scrutinized, as usual.   

After their robust rally in November and December, bond marketshave also been drifting in January. The Bloomberg 1-3 Month T-Bill Index is up +0.39% YTD, while the rest of the bond indexes we monitor are lower. The Bloomberg U.S. Aggregate Bond Index is down -1.30% YTD, the Bloomberg Municipal Bond Index is  down -1.10%, and the Bloomberg U.S. Corporate High Yield Bond Index is down -0.07%. The more volatile Bloomberg U.S. Treasury 20+ Year Index is down -5.52% YTD.

The slower pace for equity markets in January did impact the famous First Five Days indicator. Since 1950, the First Five Days indicator has enjoyed an 83.0% accuracy ratio in predicting full-year gains for the S&P 500 Index. In the first five days of 2024 the S&P 500 Index registered a 6.29 point loss. Not to despair, even after the 26 down First Five Days, the S&P 500 finished up 14 years and down 12 years. The January Barometer, developed in 1972, measures the entire month and enjoys an 83.6% accuracy ratio. The S&P 500 Index is now in positive territory, up over 147 points with a couple of days to go, so we are looking good so far.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2024 Edward D. Foy.  [email protected], www.foyfinancial.com.

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.