February Outlook: Early Indicators Suggest Continued Weakness
By: Jeffrey A. Hirsch & Christopher Mistal
January 28, 2016
We got an interesting call from our friends at Ned Davis Research this week. Our recent declarations that we entered a Ned Davis Research defined bear market in January on the internet last week and on CNBC this past Monday needs to be redacted and has inspired NDR to clarify their bull and bear market definition criteria. The criteria have not changed, but they have added new language to clarify the definition.
They have always marked bull and bear markets from peak and trough dates, but saw how confusing the existing language could be during time periods like this one. “A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify. A bear cyclical market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals in the Value Line Geometric Index also qualify.
They have now added the following clarifying statement to the criteria. “Bull and bear markets are measured at peak and trough dates, so both the time and price criteria must be met as of the peak and trough dates.” We hope this clarifies it for everyone.
With respect to the current case: Since August 25 is still the low date, the appropriate date range is 5/19/15 – 8/25/15. The market had met the percent decline criterion on August 25 (-14.4%), but not the time criterion (98 calendar days). On January 20 the DJIA was down -13.9% after 246 calendar days, but it was not a new trough. So, if the DJIA closes below its 8/25/15 closing low, then both the time and price criteria will be met.
We are flattered and humbled to be the inspiration for this clarification and love the fact, that when people question why NDR does not use 20% declines to define bear markets, They say something to the effect of, “The Stock Trader’s Almanac uses our definition.” We remain big fans of NDR, fantastic research and analysis and cycles and seasonal pattern proponents. 
Down January Negative Readings
But let’s face it, DJIA may not have violated its August low, but all the other averages have. All of our seasonal market indicators have given negative readings so far and our flagship full- month January Barometer is about to do the same at the close tomorrow unless the S&P 500 can rally about 8% from current levels to close above 2,043.94. 
This is not impossible, but it would be a top 20 S&P 500 day of all time. All but three of the previous top 20 occurred in the 1930s with two in October 2008 and one in October 1987. You get the picture; we do not appear to be at similar junctures at the present time, so 8% tomorrow is going to be a stretch.
So let’s review where we are at. Last June 2 when we put the 2016 Almanac to bed, we noted in our Outlook on page 6 that “Unfortunately, our outlook for 2016 is less than sanguine.” In our 2016 Annual Forecast made 6 weeks ago we said, “We see two scenarios for 2016. If the Fed is right and the energy and commodities price decline proves transitory and prices stabilize, we expect average election year gains in the mid-single digits. If the Fed is wrong and oil and commodities suffer further declines and the junk bond scenario unravels we may begin a mild bear market next year.
Now that the end of January is upon us and our indicator trifecta of the Santa Claus Rally, the First Five Days, and the full-month January Barometer are negative and the DJIA December Low has been violated we are not any more bullish. In tomorrow’s Official January Barometer Reading special email alert we will take into consideration all the economic data, market behavior, market internals and geopolitics and make any necessary adjustments to our forecast. As we warned last month, the next bear market may be underway.
Pulse of the Market
January 2016 is on the verge of being the worst January ever for DJIA and S&P 500. January 2009 currently holds this dubious honor with losses of 8.8% for DJIA and 8.6% for S&P 500. The rout began at the end of December and only accelerated during the first week of the New Year. Both the faster and slower moving MACD indicators have been negative and falling since early November, but appear to be on the verge of turning (1). The faster moving MACD indicator flashed a buy signal on January 26 however there has been little market follow-through since.
A golden cross, defined as the 50-day moving average crossing above the 200-day moving average, did briefly appear on DJIA’s chart (2). It proved fleeting as January’s losses quickly caused the 50-day average to plunge back below the 200-day triggering the once dreaded “death cross.” Historically, many “death crosses” appeared not long in advance of the ultimate bottom.
Dow Jones Industrials & MACD Chart
Back-to-back Down Friday/Down Mondays (DF/DM) (3) wrapped the last week of 2015 and the first week of 2016. This cluster preceded DJIA’s third worst weekly point decline on record back to 1900 and the worst weekly January loss ever (4). Six consecutive down Fridays is further evidence of the lack of confidence traders and investors have.
After advancing in nine out of 10 weeks from early October to early December, S&P 500 (5) and NASDAQ (6) have been down during five of the last seven weeks. Although not an official Ned Davis defined bear market yet, the market has been trading as such since mid-December.
Weekly Advance/Decline metrics have been firmly negative (7). Weekly Decliners have substantially outnumbered Advancers during down weeks while Advancers have only modestly outnumbered Decliners during up weeks. A greater number of Advancers during up weeks would be a positive sign and could potentially indicate the market is being to recover. This has not yet occurred.
New Weekly Highs have not exceeded 500 since last January while New Weekly Lows (8) have swelled to the highest level since last August. New Highs are likely to remain subdued for some time as the broader market is well off of its all-time highs. A steady decline in New Lows would be an encouraging sign that could indicate the bulk of the market decline is over. 
Weekly CBOE Put/Call spiked to 0.93 (9) during the week ending January 15. This was just the third time since the bull market began in March of 2009 above 0.90. The previous two spikes above 0.90 were in June 2011 and November of last year. Last November’s spike was followed by a tradable bounce higher that lasted three weeks for S&P 500 and NASDAQ.
Click for larger graphic…
Pulse of the Market Table