High Volatility Warning for January

Analysts at BTIG Forecast Potential Turbulence in Financial Markets

Analysts at BTIG warn that January could usher in increased volatility in financial markets due to several converging factors.

Market Indicators

The brokerage notes a persistent divergence between market breadth and price trends combined with complacent sentiment and positioning, which indicates that the market is not behaving typically for a seasonally strong period.

S&P 500 Trends

BTIG highlights an unusual trend in the S&P 500, where decliners have outnumbered advancers for nine consecutive days this month. This pattern has only occurred once before since 1996, specifically following the 9/11 attacks in 2001.

Historic Patterns

Analysts recall that similar occurrences in the past—December 2018, August 2011, and October 2008—preceded volatility episodes. However, the current market context is notably different from those past extremes.

Equal-Weight S&P 500 ETF Observations

An analogous trend has been seen with the equal-weight S&P 500 ETF (RSP), which has closed below its opening level for nine days in a row. This behavior mirrors events during the 2008 financial crisis and the 2015 China devaluation crisis, reinforcing the argument for potential increased downside volatility as January approaches.

Sentiment Indicators

Sentiment indicators reflect cautiousness—put/call ratios are at multi-year lows, and the NAAIM Exposure Index has recently peaked as its highest since July, indicating heightened optimism. While this sentiment can typically occur at year-end, BTIG flags it as a concern for the upcoming new year.

Bond Market Dynamics

Uncertainty grows as bond markets exhibit signs of stress, with higher yields putting pressure on market breadth and small-cap stocks. Analysts emphasize monitoring key levels in Treasury-related assets, such as the TLT ETF, which could signify broader rate-related issues if it fails to recover.

Conclusion

Given these multiple factors, BTIG advises investors to brace for potential volatility in January, suggesting that the interaction between breadth, sentiment, and broader market dynamics could lead to shifts in the market.