February Outlook: Robinhood to the Rescue, But Watch Out For February Weakness
By: Jeffrey A. Hirsch & Christopher Mistal
January 28, 2021
It’s been a dynamic six weeks since we made our Annual Forecast for 2021 on December 17, 2021 and volatility has spiked this last week of January as the merry Gen Z traders made on run on the shorts of the old guard on Wall Street. Robinhood Markets and other trading apps and services and online communities used by younger up-and-coming retail traders were able to organize en masse and create an old-fashioned short squeeze. You’ve got to hand it to them. 
Just like all new investment and trading vehicles and trends this will get under control. But as we have seen in recent years this sort of thing is becoming more frequent as connectivity and technology bring the world closer together with transactions and communications transpiring near the speed of light. This is a market flaw that runs the risk of injuring innocent investors who are not privy to what is happening. 
Honestly, we’ve seen this sort of thing before over the years. There is always a new twist and this one will get hammered out by the exchanges, the broker/dealers, the new platforms and the regulators. While it may be exciting to see the next generation embracing the market and flexing their muscle our markets thrive on fair and orderly transactions. Admittedly a little comeuppance every now and then is interesting and it does help to keep the big players more transparent on their toes.
Members of Congress from both sides of the aisle chimed in on the subject as lawmakers criticized trading restrictions of the hot-button stocks on these platforms. The new Biden administration has stated that its economic team is monitoring the situation. Perhaps this will be the issue that helps bring our divided government closer together.
Technically speaking, by some measures, the market is over extended and the selloff on Wednesday, January 27, 2021, the biggest one-day loss since October, was to be expected. Valuations and sentiment are also high. The retreat was also triggered by some disappointing earnings and perhaps the voracity of the Biden administrations barrage of executive orders and the realization by the markets that there’s a new sheriff in the White House.
But we don’t foresee a selloff of any consequence. Pullbacks and consolidations are bound to happen and also February is the weak link in the Best Six Months and worse in post-election year. Let’s look at the technical picture first. Since the market has been dominated by big tech even more for the past year during these Covid times the NASDAQ 100 Index (NDX) is the index of focus.
[NDX/COMP Chart]
Yesterday’s big selloff seems to have bounced off new support levels that have formed just above the yearend highs and the early January consolidation as well as in that gap between the January 19 close and the open on the pop on January 20. The old major overhead resistance we highlighted last fall at the September 2 high was cleared by the usual strength in the last half of December and the Santa Claus Rally. That appears to be the new major support level at NDX 12420.
Our forecast six weeks ago for the yearend rally to continue was on track as the market closed 2020 at new all-time highs. Market behavior remains on track with historical seasonal patterns. This was confirmed by the arrival of the Santa Claus Rally (SCR), which registered a 1% gain for the 7-trading-day stretch that ended on January 5. Gains continued into the first week of January pushing the First Five Day (FFD) early warning system solidly into the black. 
This puts our January Indicator Trifecta at two for three so far in 2021. If the S&P 500 can hold these gains tomorrow our January Trifecta would be satisfied with a positive reading from our January Barometer (JB). The most bullish set-up is when all three indicators, SCR, FFD and JB, are positive. The details are in the table in our January 8 Alert, but the bottom line is that the last 31 times the market hit this Trifecta the S&P 500 was up for the full year 28 times for an average gain of 17.5%.
That’s not to say we don’t have concerns. Aside from this new Robinhood short squeeze event, sentiment remains extremely frothy and complacent with the weekly CBOE Equity Only Put/Call Ratio hovering at historic lows around and under 0.40 since Thanksgiving. Then there are the rich valuations and extended technicals. Plus we have a pandemic that’s still raging, roadblocks in the vaccine rollout, a struggling travel/leisure/hospitality sector and still elevated unemployment. 
On top of all that it’s a historically weak post-election year and we are heading into February, the seasonal weak spot of the Best Six Months. But as we discussed in the Annual Forecast last month the markets have done better in recent post-election years and even better under new democrats with democratic control of congress. And while February is even weaker on average in post-election years most of the damage that brings the averages down came from massive losses in February 2001 and 2009.
However, there is strong support for the bull. The Fed continues to have our back with a commitment to keep rates at near zero for the foreseeable future and continue to flood the market with cash. More fiscal stimulus is likely on the horizon and most importantly if we can gain any traction with the vaccine rollout, pent-up demand is likely to rev the economy up again and push the market to new heights.
For now be prepared for a February pullback, but nothing sinister. With seasonality back in gear and the prospects for reining in the Covid-19 pandemic improving we expect the market to be positive for the year somewhere in range of our best and base case Annual Forecast scenarios. We will have an even clearer picture when we get our January Barometer reading at the close of the month tomorrow. 
Pulse of the Market
Right up until yesterday January was performing more in line with its bullish longer-term, historical track record since 1950, with solid gains for DJIA and other major indexes. The recent spike in volatility is much more consistent with January’s recent track record over the past 21 years with a propensity for sizable swings and volatility. Yesterday’s DJIA decline stopped right on DJIA’s 50-day moving average (1). Provided today’s rebound sticks and yesterday’s decline proves to be an aberration, January will likely finish with a gain and a bullish January indicator Trifecta will be completed.
Even though DJIA has been steadily climbing higher since mid-November, the pace of gains has been moderating causing both the faster and slower moving MACD indicators to seesaw between bullish and bearish. As of the close on Wednesday, both the faster and slower MACD indicators were negative (2).
Dow Jones Industrials & MACD Chart
After two straight months of gains in November and December, DJIA recorded it first Down Friday/Down Monday (DF/DM) of 2021 earlier this week (3). Historically, the vast majority of DF/DM occurrences have been followed by continuing market weakness of varying magnitude and duration sometime during the next 90 calendar days. It is currently to soon to tell it the recent occurrence will be shrugged off by the market or a meaningful decline could still be forthcoming. If DJIA can quickly reclaim recent losses the chances of a larger decline in the near-term would be less. 
Bullishly, DJIA, S&P 500 (4) and NASDAQ (5) weekly declines have been small and infrequent since the beginning of November and the “Best Months.” The return of seasonality persists, and it suggests that the economy and the market are returning (slowly) to a normal as the pandemic is being slowly brought under control.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has remained positive as the market climbed higher into the New Year. Advancers have outnumbered Decliners by respectable margins for six weeks straight despite losses during the week ending January 15. This broad participation in the rally is bullish and suggests the rally can persist even if there is a pullback. 
Weekly New Highs (7) had expanded to their highest level since December 2016 last week. Weekly New Lows have also declined to their lowest levels since June of last year and have bounced around near those levels. Last week and likely this week will have broken the positive trend of expanding New Highs. Should the market quickly rebound and reestablish the trend of expanding highs then further gains in the near-term are likely.
One area that warrants close observation is the Weekly Put/Call ratio (8). Readings over the last two weeks match the early December 2020 reading of 0.39 and are the lowest in our data set going back to May 2001. This suggests bullish sentiment, at least when it comes to options, is frothy at best and dangerously euphoric at worst. Market excesses rarely resolve in an orderly and calm fashion. The timing is unknown as sentiment indicators can remain elevated for extended periods especially when the market continues to climb higher.
Click for larger graphic…
Pulse of the Market Table