Stock Market Prep – Brace for a February Sell-Off

Bullishness is waning, with the stock market is pretty much flat over the past 3 months. This usually leads to a pull-back within a month or two, so investors should be wary about February’s stock market returns. February is historically a bad month for the stock market, and it looks like history may be repeating itself once again. But watch out this week for major companies reporting earnings and the first FOMC meeting of the year. This is a big week for the markets, and here’s everything you need to know.

Market Recap

Last week, the S&P 500 saw it’s first 2% daily decline since October. The S&P 500 and NASDAQ are both pretty much flat for the last 3 months. But the DOW and Russell 2000 are both up significantly. This clearly shows a shift in money away from tech stocks and into other sectors. I explained this sector rotation and what stocks investors are buying instead in this video here: https://www.youtube.com/watch?v=9n7y1ykM9JU.

It’s important not to panic about the possibility of a February sell-off though, even if a sell-off hits tech stocks especially hard. Valuations have been too high for years, and a sell-off in the market would give investors an incredible opportunity to buy quality stocks at deep discounts.

Market Sentiment

The CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) is at Neutral, which makes sense given how flat the market has been. What’s interesting as we dig deeper is that while stocks are bullish, options traders are quite bearish. And safe haven demand, such as the buying of bonds, is showing a lot of fear as well. What this tells me is that while money continues to flow into stocks, the foundation is crumbling, and investors should be cautious.

The VIX is interesting. While it also shows a neutral market sentiment (hovering between 15 and 20), it’s odd that the VIX (which measures how many put options options traders are buying on the S&P 500) is neutral when the CNN Fear and Greed Index shows options traders are bearish. Given that the CNN Fear and Greed index measures short term options and the VIX measures 30 day options, it could point to a short-term bearish sentiment among options traders that doesn’t necessarily play out 30 days from now. This could indicate a short-term drop in the market in the first few weeks of February followed by a rally at the end of February and into March.

Technical Analysis

The daily charts are quite polarizing. The DOW, S&P 500, and NASDAQ are all almost 100% neutral. But the Russell 2000 is quite bullish. This highlights the sector rotation we often see during market corrections and bubble bursts. Small cap stocks often out-perform large cap stocks, especially when large cap stocks have been rallying for years and small caps have been left behind. This indicates further flat trading in most markets and a continued rally in small cap stocks.

The weekly charts are similar to the daily charts. The S&P 500 and NASDAQ are both neutral on the weekly charts. The DOW weekly chart is slightly bullish. But the Russel 2000 weekly chart is actually so bullish that it’s approaching over-bought. I don’t see an end to the bullishness on the Russell 2000 yet, but we might get a flat or down week this week before continuing higher.

Economic News

The biggest economic news being released this week is the FOMC meeting on Wednesday. Traders are largely betting that the Fed keeps interest rates the same. As a result, we’re not expecting a large impact to the markets from the rate decision. But what Jerome Powell says during the press conference could have a large impact. The issue that has investors concerned is the fact that the economy would be in a recession if it wasn’t for AI spend. But with AI spend showing fake revenues from round-robin investing, people are becoming increasingly concerned that the US is actually in a real recession. Depending upon what Jerome Powell says on Wednesday, he could either calm investor fears or increase them. I do not see a situation where the markets rally after the Fed meeting. I see the markets either trading mostly flat or falling significantly.

Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar

Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm

Earnings

Mega cap companies are reporting earnings this week, so expect outsized market movement due to earnings. Microsoft, Meta, and Tesla all report Wednesday after the bell, while Apple reports Thursday after the bell. In addition, there are numerous other large companies reporting also. So keep your eye on earnings this week, because they, in addition to the FOMC meeting, will be major market movers.

Crypto

Crypto is continuing to struggle. It appears to be near the end of this consolidation period, and I suspect the selloff will continue soon. I reiterate my $55,000 price target on Bitcoin.

Other Things to Know