S&P 500 forecast for January 2020

Everything points to a positive January 2020 but nobody can predict how Donald Trump will behave.

There is a saying among US stock investors – “as goes January so goes the year”. The idea that a sentiment that starts at the beginning of the year can drive confidence through the balance of the year is realistic if global economic growth is accelerating or beginning to rebound.

The outlook for further global economic growth will depend on the outcome of a US-China trade deal. A phase-one agreement in principle has been announced but the details will eventually need to be spelt out and signed.

Historically January has been a mixed month providing little seasonal direction. The technicals point to a positive S&P 500 forecast for January 2020. Where will the index go next month?

A phase-one deal

The goal of the US trade war with China started by US President Donald Trump was to turn the trade imbalance. This is expected to be accomplished by demanding that the Chinese stop requiring US firms to turn over intellectual property if they want to have business activities in China. Unfortunately, this concept is part of the Chinese economic architecture and the way state-owned countries can flourish.

What appears to be the case is that the phase-one deal amounted to little more than China agreeing to step up US farm purchases. The US would, in turn, refrain from establishing new tariffs that were scheduled to go into effect on December 15.

It is true, that this moment is a turning point in the escalating trade war and there is the potential for further gains if cooler heads prevail. President Trump is not known to have a cool head, which means market participants will likely experience volatility again in the new year.

Consumer spending is stable

Holiday spending appears to have been robust, but November retail sales paint a less upbeat picture. Retail sales increase by less than expected rising 0.2 per cent in November compared to expectations that US retail sales would rise by 0.5 per cent. This follows an upward revision in October retail sales that rose to 0.4 per cent compared to the initial reading of 0.3 per cent. Year over year US retail sales rose 3.3 per cent in November.

When you exclude what is referred to as the control group, automobiles, gasoline, building materials and food services, retail sales edged up 0.1 per cent in November after rising by an 0.3 per cent in October. Core retail sales grew at a 2.9 per cent annualised rate in Q3.

January consolidation

January’s price action can be volatile. During the past 20 years, the returns in January appear to be mild relative to other months of the year. January has experienced a 14 per cent decline during the past 20-years and a 7 per cent rally. This compares to months such as October which has seen a decline of 30 per cent (during the financial crisis) and a rally of 15 per cent.

Some statistics say that over longer periods of time January has been a good barometer of how the year will perform. According to the Stock Trader’s Almanac, going back to 1950, the returns in January have predicted the outcome of the year 87 per cent, through 2017. In the years January was positive, going back to 1945, the market ended higher 83 per cent of the time, according to CFRA.

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Technical analysis

The daily, weekly and monthly charts of the S&P 500 analysis all look very promising. The daily chart shows a rally with momentum turning positive and the MACD (moving average convergence divergence) index generating a crossover buy signal in December.

The monthly chart is an excellent place to start to evaluate the performance of the stock market in January. Momentum is rising with the monthly MACD recently generating a crossover buy signal. The monthly MACD histogram is accelerating higher, with a positive trajectory that points to higher prices for the S&P 500 index.

Momentum, as reflected by the relative strength index (RSI), is also on the rise, with the index climbing close to the overbought trigger level of 70. A close above 70 could foreshadow a correction. Over the past five years, the RSI has peaked near 90 in January 2018 and 80 in August 2018.

Lastly, the accumulation distribution line continues to rise on a monthly basis which is a positive sign for the S&P 500 index. Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money in and out of the S&P 500 index. Chartists can use this indicator to affirm a security's underlying trend or anticipate reversals when the indicator diverges from the security price.

Take away: prediction for January

US stock prices will likely live and die by headlines that describe the state of the US-China trade deal. If nothing is mentioned the path to least resistance is upward. January has historically been a barometer of future returns during the balance of the year but the seasonals say that January is up only 50 per cent of the time.

The technicals are pointing to higher prices. Momentum is accelerating on a daily and monthly basis. Money flow is entering the market and volume is rising as prices are climbing. This all points to a positive S&P 500 forecast for January 2020. There is a catch. Nobody can forecast how Donald Trump will behave. If he has a tantrum, all bets are off.

FURTHER READING: Nasdaq 100 forecast for 2020

FURTHER READING: Alibaba stock price prediction for 2020 and beyond

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