The year has got off to a flying start with bullish moves being seen in stocks and some decent moves in other markets. Due to many markets spending much of the past 12-15 months in low volatility trading ranges, 2018 is likely to be a year of breakouts, expanding volatility and momentum, and extended trends.
In other words, ideal trading conditions.
The stock markets shrugged off a weak close to 2017 and opened the year with a bang and never looked back. The Santa Claus rally, which runs from the 21st December through to the 2nd trading day of the year, in this case, the 3rd January was bullish, and this points to a bullish year in stocks. The next seasonal indicator is the first five trading days of January, which has an 83.3% accuracy in predicting full-year gains for stocks is also off to a good start with a large four-day rally to kick the year off. Unless we get a huge down day on Monday, this indicator will also be bullish.
The biggest negative for stocks, in particular, the US stock indexes, is extreme bullish sentiment. In fact, bullish sentiment on the S&P 500 is at 95% bulls, which is the highest reading I could find. Bullish sentiment at extreme does not mean that a reversal is imminent, but large speculators have their largest long position since March 2013. A pullback to ease the sentiment may be seen in the next week or so, but is not necessary. All the technicals are bullish.
The Nikkei also launched big move to start the year as it broke out from an ascending triangle (that interpretation ignores the spike on the 9th November). This week could see a test of 24020, which was last seen in June 1996.
From last week: “Light Crude made its highest rent since June 2015 but is heading into what may prove to be a strong resistance area around the 62.00 level.” Light Crude reached the 62.00 level, printing 62.21 before reversing slightly. Commercials now have a record net short position. The trend remains bullish for energies except for Natural Gas.
Sugar remains a choppy market but could be building up for a big move. Commercials are once again net long, not far from a record net long position. Such a position often results in a large up move. Time will tell.
In recent weeks we’ve written about the January effect in EUR/USD and the tendency for this market to make its high or low for the year during January. It’s too early to say which way this will go, or even if the pattern will work this year. The low for 2017 was made on the first trading day of the year, which was the 3rd. This year the first trading day was the 2nd, and the low for the day was 1.2056 basis the March contract. Of course, we could also see a reversal and the high for the year printed this month.
The dollar index, which is a near-perfect inversion of EUR/USD fell to its lowest level since September, and the September low is the next target.
Interest rate futures
Interest rate futures resumed the downtrend this week as both the 5 Year T-Note, and the 3-Month Eurodollar (Sep-18 contract) fell to new lows for the current move. The 10 Year T-Note was also weak and tested the recent low. The 30 Year T-Bond remains the strongest and has yet to breakdown.
The UK Long Gilt remains range bound, trading roughly in the middle of the range that has been in place since March last year.