Brace for more volatility in January: BTIG

Investing.com -- Analysts at BTIG warn that January could bring a wave of heightened volatility in the financial markets, with multiple factors converging to signal potential turbulence. 

The brokerage cites persistent divergence between market breadth and price trends, coupled with complacent sentiment and positioning, as indicators that the market is not acting as it typically would during seasonally strong periods.

BTIG highlights an unusual streak in the S&P 500 , where decliners have outnumbered advancers for nine consecutive days this month. Such a trend has only occurred once before since 1996, during the immediate aftermath of the 9/11 attacks in 2001. 

Analysts note that similar patterns in the past—such as in December 2018, August 2011, and October 2008—preceded volatility events. However, the current market conditions differ markedly from those extreme periods.

A parallel trend is observed in the equal-weight S&P 500 ETF (RSP), which has closed below its opening level for nine straight days. 

This is reminiscent of patterns seen during the 2008 financial crisis and the 2015 China devaluation crisis. BTIG suggests that these historic parallels underline the potential for greater downside volatility as the calendar shifts to January.

Sentiment indicators add to the cautionary outlook. Put/call ratios remain at multi-year lows, and the NAAIM Exposure Index recently hit its highest level since July, reflecting heightened optimism. 

While such sentiment can be typical for the end of the year, BTIG flags it as a concern as the market transitions into a new year.

Adding to the uncertainty, bond markets continue to show signs of strain, with higher yields exerting pressure on market breadth and small-cap stocks. 

The analysts stress on the importance of monitoring key levels in Treasury-related assets, such as the TLT ETF, which could signal broader rate-related challenges if it fails to rebound.

Given this confluence of factors, BTIG advises investors to prepare for potential volatility in January, warning that the interplay of breadth, sentiment, and broader market dynamics could lead to market shifts.

Source: Investing.com