Weekly Memorandum 1/27/2020

The last week of January is upon us, and it sure has been quite the start to the new decade in terms of world events. In the past two Weekly Memorandums, we shared how the impressive bull run for stocks appeared increasingly vulnerable.


In the 1/13/2020 column, it stated, "Stocks appear slightly overbought in the short-term, and are showing some signs of waning upside momentum, but in no way does the uptrend appear under threat at this time."


In the 1/20/20 column, it stated, "...the uptrend is as strong as can be, but we are increasingly suspicious in the short-term."


The warnings were there, and as we begin January's final week of trading, the major stock indices are down about 1.5% in early-morning futures markets. Usually, when markets gap up or down to start the week, they tend to follow through in that direction. A couple concerns we have now are from a technical and seasonal perspective. Technical because if we erase all of January's gains in the last week of the month, it will damage the market's technicals on a monthly scale. And seasonal because January tends to be a historically reliable indicator for how stocks perform during the remainder of the year.


On the back of equity weakness, the 10-Year T-Note is now trading at its highest level since mid-October. Gold and silver are also benefiting from a flight to safety. Crude oil is down big too, and this is a market worth monitoring closely, especially if it breaks below $50. If crude oil falls under $50, look out below. Not only would this damage American energy producers, but it would greatly lower inflation expectations, which should push interest rates lower. It would, however, benefit consumers at the gas pump, so no complaints there.


On the forex front, the U.S. Dollar is holding up fairly well. This is yet another indication of the insatiable demand by foreigners for American assets. Throughout January, most of that demand was directed towards stocks, but now it's flowing into bonds (at the expense of stocks). Such is the nature of markets. We know capital flows remain strong so long as the dollar continues to hold up. The only major pair it's really down against this morning is the Japanese Yen, which is fairly normal, as the Yen tends to rally well when the market is in a "risk-off" environment.

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