Inside Markets — January Effect

Light attendance/volumes and thin liquidity are impairing the signal quality of market internals, but we see early signs of a ‘January Effect’ rewarding last year’s laggards. The January Effect is a short-lived dynamic (1-2 weeks) where we prefer to observe rather than participate. Cross market signals are also impaired, but we still see 10-year yields >4.60% becoming a headwind for equity markets. Ten-year Treasury prices staged a bullish reversal on 12/30 as quarter-end pension fund rebalancing vastly favored fixed income over equities. Importantly, the bullish reversal came a session after 10-year yields closed above 4.60% on 12/27. The advance through 4.60% on 12/27 resulted in a ~2% pullback in the SPX and we’d expect more pressure if the bullish outside day at 4.625% fails to hold. High valuation equity groups tend to pullback more when bond yields rise through key technical levels. This explains the underperformance in Tech that began after 10-year yields pushed to a 6-month high on 12/18 and reinforced on the 12/27 break above 4.60%. The bullish equity signal from 10-year yields would trigger below the 4.38% level.