Inside Markets — SPX Reversal

The SPX looks like it’s completed the shallow consolidation phase we were expecting when leadership became unsustainably narrow at the end of October. Our confidence in a healthy consolidation rather than a sharp correction was based on the absence of bearish distribution patterns and momentum divergences that usually proceed corrective price action. All bull markets are vulnerable to an occasional test with Friday’s reversal from a well-defined channel support at ~6640 completing the test in our view. The orderly, low-volatility rally continues for the time being but we’re now entering a time of year when trends become a little less orderly. The January Effect is a dynamic that tends to favor small cap stocks and YTD laggards. Originally, the January effect was explained by tax-loss selling in December. The positions sold in December, were then added back 31 days later in January. Over the last two decades the January Effect began creeping further into December and even November in recent years. The January Effect is supposed to reward YTD laggards and small cap stocks. The recent recovery in Health Care looks/feels like the early onset of the January Effect with retailers likely to be close behind.