I can clearly say that January 2024 did not start as I expected. My guess was this: I think January will be good, I expect corrections in February and March. But I think that S&P 500 will move towards 5200 - 5400 throughout the year. For now, my thesis is not correct. Because we started January really badly, and if this week goes bad as well, January will add records to the bad start records. I don't want to immediately throw out one of the headlines that some memorizers like to make and say that we have entered a bear market. Because what we have seen so far is more at the level of a technical correction. It's a pretty harsh technical correction, but it's still at the technical correction level and we still have reasons to look at the markets with hope. But I will offer you a very realistic analysis. You will make your decisions at the end of this realistic analysis. On Friday, I said it's time to be careful, let's tighten the hedges, let's tighten the stop losses. Maybe it would be useful to put some cash aside. Because it's a bit complicated.
Maybe the market will not laugh at us so much this year, or more importantly, maybe the market will offer us some buy-the-bottom opportunities. I prefer to have cash when entering into those opportunities. That's why I switched to saving mode.
When we look at the stock markets in general, we have had one of the worst starts in the last 20 years. To be honest, the decline continued in the first four days of the year. If you remember, we fell on the last day last year. This tells us that we are in trouble at the January barometer. What was the January barometer? The Santa Claus rally was supposed to happen, but it didn't happen. The first 5 days are supposed to be good, positive, I mean not every day but the total, but it was quite negative in the first four days. Unless we have a freak rally today, that's gone too. A third issue remains. Will January be good or not? If the January total is bad, the barometer is down, and when the barometer goes down, there is a high probability that the stock market will not perform well that year. This is what it looks like initially.
When I take a look at Twitter, you always see very scary statuses of bears. For example, there are those who compare the decline in January this year to the decline in January 2008. This is of course very scary. Because 2008 was terrible. There are those who compare it to 1999. 1999 was a scary time. It's worth admitting that it's a little scary. And the frightening news flow never ends. Apple is constantly downgrading. When Apple downgrades, it pulls the entire S&P 500 down. There are constantly these types of bullish news flows based on stocks or indices.
The place I fear the most this year is China. There is bad news from China again. The decline in the Chinese hangsang stock market reached 1.78%. It means that the Chinese stock market has broken the lower upward trend that has been going on for years. The trend has been around since 2004. There are two reasons behind the rather alarming decline. First, China is afraid of what is happening in the American stock market. Secondly, China has its own problems. Growth is over. Disinflation, that is, a decrease in inflation. They are even going somewhere close to deflation. And the Chinese government does not sit still. This week, it sent ships to Taiwan again. It was a little scary. It also brings a lot of regulation to the gaming market. This negatively affects technology stocks. You see the decline in Hangsang. Of course, I have to make fun of economists a little here. China will surpass the whole world. They have been saying for years that China will be bigger than the American economy and so on. The trend is developing in the opposite direction. The relative growth index of the Chinese economy compared to the American economy has decreased. Since 2020, let this be a side note.
Well, when we look at the level of decreases, the decrease in the four main indexes in Russell reached 3.24%, which frankly surprised me. Because I think small stocks will do better this year. They had a tremendous performance in the last 2 months of last year.
Nasdaq is down 1.44%. I can't say I'm super surprised by this. Because remember, Nasdaq 100 completed last year with a lot of rise. This remained in the correction zone a little bit, and on the last day they moved slightly upwards. There is a decrease of 0.96 in the S&P 500. There is a 0.72 decrease in Dow Jones in the first four days of the year.
In other words, there is actually not as terrible a decline as it seems compared to last year's rise. When we look at ndx, last year the increase was 51%, we are retreating a little from there. The S&P 500 was up 23%. The rise in Dow Jones is 1.68%, and in the Russell small stocks it is 12.713%. When we look at it, only 7 days broke the average downwards. It remains where it was in 20 - 30 - 50 and 200 days, above all of them right now. Nasdaq has a slightly tougher situation. It has broken 7 days and 20 days. 30 - 50 and 200 days old remain in place. He only broke 7 logs on Russell. We are well above 20 - 30 and 50.
Considering all this, this is still a correction. Because if the indices are still above 20 days, 30 days, 50 days, 200 days, this is a correction zone. It definitely does not mean that we have entered a bear market. So why are we experiencing the correction? There are two reasons for this. One of them is taking profit. Frankly, I interpreted the sales in the first two days of the year as this. Because there are people who made a lot of profit last year. They did not want to sell them at the end of the year to avoid paying taxes. That's why they started selling a little at the beginning of this year. One of the reasons is that along with these profit takings, sectoral rotation also takes place. When we look at it since the beginning of the year, we see that technology stocks are the ones that have been hit the hardest, 4.34%. On the other hand, there is a serious upward trend in the health sector, for example, 2.01%. There is an upward climb of 1.89 in public services, 1% in energy, and 0.40 in financial services. In other words, there is some outflow from sectors that made a lot of money last year. Maybe some of it goes to cash again. Because there is also a slight increase in money funds in America. I guess people have been taking some precautions since the beginning of the year. But a significant portion of them are rotating towards other sectors.
Sector rotation does not occur in bear markets. Mass sales occur in bear markets. This year, if I'm not mistaken, there was such a mass sale on the third day of the year. It takes all the indices down, but apart from that, we are still in a rotation and we are in a balancing state. Again, this may indicate that we are in a bull correction, not a bear market. We should not be too precise. But we can remove it in the first four days.
But what really scares the stock markets is the increasing interest rates in American 10-year bonds. We see that the tnx index has been moving upwards since the beginning of the year. However, it had been in a serious correction since October - November last year. Why are the interest rates of American 10-year bonds increasing in the market? Because once again, the concern has begun whether the FED will not consider interest rates. The main reason for this is what is happening in the labor market. I was already sure that these discussions would happen. But I was expecting these in February - March. These started to be discussed very early. When I look at what is actually happening right now, I think these discussions are very futile. But what is important is not what I think, but what the entire market thinks and how they want to evaluate the news.
Acting on the instinct of profit taking and rotation, Wall Street likes to evaluate the current news negatively and evaluates the slight rise in 10-year interest rates as super bad and reflects it on stock sales. As a matter of fact, when we look at it, we see some negativities in the FED Watch tool, that is, our tool that tries to analyze what the FED will decide in the next meetings. For example, as of the end of January, the probability that the FED would reduce interest rates was 17.6%. This week before the new year, the incredibly optimistic market has fallen to that 6% point. This shows that they are a little demoralized. More importantly, But March. The market was very confident that there would be a discount in March. There was a 73.4% probability of a discount of 25 bass points or even a 15.1% probability of 50 bass points, that is, when we look at the total, there was an estimate of 80 bass points of discount. Where did it land? 50 points, it went down to 3.8%, then it rose slightly to 4.1%. 25 basic points decreased to 60% probability and then increased slightly to 64%. Thus, the stock market actually started to point out that interest rates might not decrease in March. What is the main reason for this? What is happening in the employment market? I think there is a huge misunderstanding here. Now the fear is that if the employment market is very buoyant, inflation may surge again. Because the amount of money people will spend is increasing. This is also reflected in inflation. As a matter of fact, the data coming on Friday is above expectations. It turned out that new jobs were created in America.
In fact, the job market in the United States is weakening very seriously, and if the Fed sees what I see, it may have to cut interest rates even before March. Because remember, the FED actually has two main priorities. One of these is to reduce inflation, and the other is to keep employment at a certain level. Employment appears to be strong. The lowest unemployment data of recent times is coming, etc., but the truth is not like that. The first thing we need to look at is where employment is created. In the last month, there have been two major sectors, one of which is health services, which is a place that is very affected by government policies. The FED is not affected by interest rates. Secondly, the state itself recruited a lot of personnel. The American Government has created plenty of employment. The third area is the accommodation and entertainment sector. This is a service area where cheap labor works. Employment growth has slowed down significantly in almost all other areas, even in services such as information technologies, transportation and storage, which is a leading indicator. Because if there is a loss of employment in transportation and storage, this is a sign of the slowness of the economy. There are serious losses, what does this tell us?
Yes, employment seems high. But the main reason behind this is the government's employment, that is, the FED's keeping of high interest rates has actually started to hurt the private sector. Private sector recruitment is also slowing down. In fact, when we look at some sub-sectors, such as production, they have stopped completely or may go backwards. I guess the FED will see this detail. Moreover, there is a problem in the flow of employment data that I mentioned before. There are also serious revisions coming to retrospective data. In other words, after previously giving us a high employment report, they revise it backwards the next month. Look, we see here how harsh the revision is for the year total. It was only slightly upgraded in July. Why does this happen? Whether you blame it on bad intentions or an error in the measurement methods. But in fact, employment in America is doing worse than we have been reported so far. In another indication that things are going badly, labor force participation started to decline this month. This is an indicator that worries me. Why don't people consider joining the workforce? Because they believe they cannot find a job. There is a break there too. Finally, most of the jobs created are part-time jobs.
Salaries are increasing a lot in relative terms and so on, but in reality there is no significant increase. Yes, there is a bit of a recovery. So, when we look at the inflation adjusted version, this is another indicator that the employment market is not inflationary. In this case, if the FED is analyzing these details, it needs to discuss interest rate cuts as soon as possible. Because the problem of employment, which is one of the two missions, seems to be growing, and if the FED does not do this, America may still fall into recession. In 2024, America is still not in recession, employment is still strong, but there are breaks. And what the FED will do from now on is important. This is where the market is confused right now.
Because on the one hand, we think that employment is strong, but when we look deeper, there is not such a picture. This time, concerns begin about what the FED will decide. I think a big part of it is noise. I am sure that the FED has seen these reports. The possibility of the FED increasing interest rates from now on is zero. The probability that the FED will not reduce interest rates from now on is zero. I think a discount is coming in March. I think the FED will make discounts of around 25 basis points 3-4 times this year, that is, a discount of 100 basis points. Recent data changes my view. It may be more discounted. What is important here is what kind of timing and communication the FED will explain this to. If it allows a recession and cuts after this employment data breaks further, stock markets will go down. Because the market panics because something bad is happening. If the FED expresses this as soon as possible, if I'm not mistaken, we have roughly 3 weeks until the next FOMC meeting, or even before that, maybe in some meetings attended by Powell; Even if he says, "We are very pleased with the current level of inflation and we are thinking very much about interest rate cuts," things may go back to normal. That's why we are at a critical point now.
In 2023, I was super ambitious. There were two reasons for this. First of all, I strongly believed that inflation would decrease and the FED would loosen its interest policies towards the end of the year. Secondly, the stocks were very cheap. This year, stocks are not very cheap. Because last year, we have already experienced a serious rally, especially in Nasdaq, and on the other hand, the discussions about what the FED will do are becoming more and more interesting. Does this mean we are dead and done? No, but uncertainty is increasing, the stock market does not like uncertainty, and when the feeling of profit taking and sector rotation comes along, we suffer a little.
On the other hand, there is a famous greed index published by CNN. I mean, how ambitious people are. He switched to Extreme Greed towards the end of last year. I mean, people were incredibly ambitious and greedy about the stock market. Now he has turned to greed. This means that the desire to buy is still high. How do they measure this? First, they look at the momentum of the market here. They look at the 125-day average. As long as we stay above that, they think there will be extreme greed in the market. Stock Price Index, in other words, what they look at here is the 52-week average of the stocks at their highest level on the New York Stock Exchange. The situation seems quite high there too. Stock Price Breadth: Is this increase evenly spread across stocks? It's still high there, even if we bend our necks slightly downwards. Put Call Options; Put options are the belief that stocks will fall in the future, Call options are the belief that stocks will rise in the future. Here we see a slight upward increase in put options. But there is still a lot of call option weight in the market. That's why they called it greed. Market variability, Market volatility, this is what they call the fear index. Indicative of this, Wix is still in a quiet place.
Although the stock market fluctuated quite sharply last week, it did not go up significantly. What this means is; People buy some put options. Maybe, but they don't sell call options much yet. That's why they called it neutral, meaning it's a bit uncertain. But we're still actually in a pretty positive place. It is also pleasing to see that Wix has gone crazy downwards, especially on the last day, and finally, is there an increase in the demand for Safe Heaven Demand, that is, safe stocks and safe assets? There has been a sharp decline since last year. Now there is a slight increase since the beginning of the year, but there was a slight decrease in the stock market again on Friday. So, there seems to be no serious problem with the greed index shown by CNN yet. This again shows us that we are in a correction. Of course, we should not pay too much attention to these graphics.
Ultimately, the main news streams always influence us more. For some, it is triple top, for some it is cup and handle. Technically speaking, triple top is dangerous. Are we generally there in the S&P 500, the Nasdaq? There are always fears in the market whether we will fall hard. But on the other hand, when we put this into a slightly bigger picture, we may actually be somewhere. A cup handle, which means we could be there in an extremely bullish formation. Compared to growth stocks and value stocks, it seems that growth stocks are still in the process of building a handle, that is, we may have a lot of room to go up.
Things can change when you change your time period. So if we just look at what's happened since 2020, there's a very scary triple top. But when we extend the chart to the 2000s, there is actually a cup Kulp format that will go down in books. Which one you believe is obviously up to you, I still tend to believe this is more true.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
