January proved to be one of the toughest months for stocks in years. The Dow Jones Industrial Average (chart) closed the month down 5.5%, the Nasdaq (chart) closed down 8%, the S&P 500 (chart) fell 5.1% and the small-cap Russell 2000 (chart) finished the month out down almost 9%. If it wasn’t for the strong month end rally, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) would of closed out in correction territory. Clearly China and Oil continue to grab the headlines and continue to make investors very nervous. However, on Friday the Bank of Japan in a surprise move implemented negative interest rates for the first time ever in an attempt to aggressively stimulate their struggling economy. So once again a central bank acts and the markets respond. Even our own Federal Reserve stated last Wednesday that they are on high alert pertaining to the global markets and the affects that are being felt here at home. In other words, there may be a pause in raising interest rates here in the U.S.?
That said, what never ceases to amaze me is how technically disciplined the markets can be. If you look at the major averages over the past two weeks you will see that all of these key indices held their August 2015 lows. Especially the Dow (chart) and the Nasdaq (chart) which traded down almost to the nickel to their respective August lows. In my previous blog I cited the Federal Reserve and their policy shift to raising interest rates and the fact that now markets and equities can be assessed on their own merits versus what the central banks may or may not do. Well Friday’s Bank of Japan’s move is a reminder that central banks around the world are ready and capable of intervening at any point in time. Which brings me back to this, how in the world can you confidently have a short thesis in these markets? In my opinion, this model is simply too risky when you have monetary policies that can turn on a dime.
So what’s an investor or trader to do? One thing that stands out to me is throughout all of the noise and chatter is that the technicals continue to perform with the utmost efficiency. Whether markets or equities are overbought or oversold vis-à-vis the relative strength index (RSI) , or support lines are met and hold. No one can deny how disciplined and efficient technical analysis can be.
Good luck to all 🙂