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Part I: The World Market Model
Only one month into 2023, and already, things are changing? My, my, the world and the markets just keep moving.
Let’s see how markets look in the World Market Model—Van’s map of the global situation.
Overall, we see so much more green at the end of January compared to the 2022 year-end map.
Some highlights from the model:
- US market segments are all positive now, with two green symbols—Mid-Cap Value (IJJ) and Small-Cap Value (IJS). Is growth over and value back in?
- Europe (again) is the strongest region in the world. The EU countries in the model are all green, with Greece (GREK) and Italy (EWI) both up about 30% in the last four months.
- Energy related symbols are no longer the only green in market sectors. Other green symbols are gaming, homebuilders, insurance, aerospace/defense and robots/AI. Volatility (VXX) is one of the weakest symbols in the database this month. (See further below for the market volatility chart’s decline.)
- The most talked about sectors are a mix from red to green. Bitcoin (GBTC) is positive again for the first month in a long time. Hemp (HMLSF) continued to earn green but the chart looks sideways at best.
- Currencies: USD (UUP) is in a very bearish mode now. Conversely, many other currencies are in bull mode.
- Many country markets in Asia turned green in January, with only two countries left in brown.
- The American markets outside of the US are green and yellow. Mexico (EWW) has quite a strong Market SQN score and is up around 30% in the last four months.
Commodities are nearly all positive, with an even mix of yellow and green. Natural gas (UNG) is the worst performing symbol in the entire database. It seems to march to the beat of its own drummer, independent regularly of the broader energy sector. Silver, steel, gold and base metals all have strong scores.
Real estate symbols are weakly positive. Bond symbols are yellow at best and mostly brown. With the Federal Reserve committed to continue raising rates – even if at a slower pace – prices for interest rate based ETFs will remain under pressure.
For the first time in many months, all of the symbols on the top list are green. After doubling from July to December last year, Turkey (TUR) earned the top spot in the database last month while its neighbor, Greece (GREK) earned the top score in January. The EU and individual country equity markets are showing strength: Italy, Poland, Germany, France, and Spain. Other spots on the list went to Mexico, energy, and commodity-based symbols.
The bottom list has the very weak natural gas ETF (UNG) as well as many volatility related symbols. The rest of the list has several countries and USD symbols. No crypto related symbols made the bottom list this month.
Watching the shift in the database market categories “bulge” has been interesting.
- October: 50% of the symbols were Very Bearish
- November: 49% were Sideways
- December: 45% were Bearish
- January: 55% were Sideways
While Van’s World Market Model includes lots of non-equity related issues, the pattern above for the majority (or near majority) of symbols closely correlates with the S&P Market SQN chart below. Perhaps not so surprising? S&P 500 companies are global enterprises and they consume lots of raw materials to produce products and services across geographic markets.
In any case, at the end of January, 1% of the database was Very Bullish, 24% was Bullish, 55% was Sideways, 17% was Bearish and just 3% was Very Bearish. That’s a marked improvement for the bulls from recent months.
Part II: The Big Picture
All eyes are on the Fed. Should they be? Well, that’s a question for another day and another article. For the purpose of the big picture process, however, the Fed’s actions affect the markets and that’s the relevant consequence for traders.
So, what are the other big picture factors affecting the stock market?
- The USD continues to weaken.
- The Chinese economy is reopening.
- There is widespread anticipation of a US recession in 2023.
- The rate of inflation is slowing.
- Consumer spending softened in the 4th quarter.
Part III: The Current Stock Market Type Is Sideways Normal
The Market SQN scores for the various periods we measure range from Bear for the longest timeframe (200 days) to Bull for the shortest timeframe (25 days).
200 days – Bear (Bear for the last two months)
100 days – Sideways (Bear last month)
50 days – Sideways (Sideways for the last two months)
25 days – Bull (Bear last month)
The S&P bottom in October has held for two legs up. This chart does not display the much-watched 200-day moving average, above which the index has closed for more than a week now. Supposedly, that’s a key benchmark for a lot of institutional money.
With the recent rise in the index, the Market SQN score has zoomed up to the Sideways zone.
Volatility continues its decline since the October S&P lows and has returned to the Normal zone.
The indexes start the year with a plus. The biggest loser of 2022, the NASDAQ, was up the most for January, though it remains well off of its high.
Part IV: Van’s Four-Star Inflation-Deflation Model
While moderating inflation is in the headlines, let’s see what Van’s model says for January.
It’s another month of mostly neutral results for the four-star model. The old version generated a zero score—balanced inflation and deflation. With BTC added in, as Van did over the last few years, the result goes slightly inflationary.
Part V: Tracking the Dollar
The USD index has dropped 11% in the last four months. This move and the interest rate picture probably have the biggest influences on the market at the moment.
Conclusion
Investors have my sympathies. In 2022, the S&P was down 19% and the previously raging NASDAQ was down 36%. Buy and . . . hold? Buy and cry a little maybe. Truly long-term investors, however, can take comfort in knowing that bear markets do give way to the market’s upward bias in time. A little faith and a few years (or more than a decade?) will restore the market returns to their long-term positive averages. That will happen eventually.
Traders, on the other hand, had a field day in 2022. Not just day traders but swing traders too. While the S&P was down 19% for the year, a more precise description would be that it fell 27% into October and has risen 15% in the three months since, with multiple 5% and more than 10% reversals along the way.
Even “longer term” traders in the “slower moving” Forex markets had the chance to catch some great moves. In the first ten months of 2022, JPYUSD fell 25%. And in the three months since, it has moved up 18%. That’s just one of the major pairs. The swing traders and day traders using Gabriel’s Forex systems had a great 2022. (He will teach both newbies and experienced traders his three proven Forex systems in his March Workshops.)
So, will the volatility of 2022 continue? Will the dollar find support soon? Have equities been responding to the expectation that the Fed will truly engineer a soft landing? Are we on our way back to hitting all-time highs again?
Different people have different stories and opinions. Last week, Jeremy Grantham released a paper with some longer-term thoughts about the stock market. He has a proven track record managing money well for four decades so his material deserves consideration. Grantham’s title forebodes his leanings—“After a Timeout, Back to the Meat Grinder”. He believes the markets are at a pause in a substantial longer-term decline, which he believes will likely resume in a few months. Interestingly, he is uncomfortable that the recession forecast for this year, 2023, is the most widely predicted recession ever. That makes it less likely than if people were more optimistic. But, still likely at this point.
Grantham has developed a set of well-developed beliefs through extensive research and personal experience. Those beliefs have helped him succeed over the course of his long career. That there are so many smart, aggressive, and strategic actors in the markets astounds me frequently. While many different kinds of traders and strategies can find success in the markets, remembering the caliber of the other players can also keep one humble.
You and I may be taking the opposite side of a trade from such market geniuses. You can worry about that or you can focus on your self-work, monitor the big picture and market type, employ the appropriate trading systems and follow your systems’ rules. While Van’s model for trading excellence may not seem simple, it’s a whole lot simpler than many traders’ (professionals included) convoluted approach to trading.
We’ll visit the market type again in early March. Until then, trade well.