15 January 2024 - Thoughts on the Market

It has been an interesting start to the year, with lots of seemingly stochastic price action in multiple markets. Let’s try to make sense of what has occurred so far, and let’s try to figure out where we are heading from here.

I have always felt that it is best to tread carefully during the first two weeks of the year. Many bankers are on holiday, and trading conditions are light – and therefore, distorted. This is particularly the case after strong trending moves took place at the end of the prior year, as was the case in 2023. It was this basic principle that helped me determine that the markets were set for short-term reversals in the beginning of January. Speculative traders had pushed the markets into extreme overbought and oversold conditions at year-end to in order to capitalize on the trends and earn some extra year-end incentive fees. Early January is when they typically would want to reduce their exposures and realize some profits. The logic of this simple observation works nearly every time, and it worked out perfectly this year.

What is unusual about this year is that essentially every major trend that was developing in December went into reversal mode at the start of this year. Whether we were looking at stock market strength, the sell-off in U.S. yields, or the general weakness in the dollar, every market reversed in early January. In many of these markets, these short-term corrections were sharp, but short-lived.