Weekly Edge: Factors In Play Following The January Rally

Summary

• Last month was the best January for U.S. equity markets in over 30 years.
• The IPO market is still expected to be strong in 2019 despite the delay caused by the government shutdown, according to MarketWatch.
• Each of the 11 sectors represented experienced an increase in momentum last week.
• With earnings report season in progress, the USA had jumped to number seven two weeks ago and has now climbed to number six, overtaking World Equity.

By Ansh Chaudhary

Last month was the best January for U.S. equity markets in over 30 years. Analysts at Goldman Sachs believe investors who sat out during January likely missed a bulk of the returns for the year. Although strategists don't expect markets to retest the December 2018 lows, they do expect that trading will be relatively flat and skinny following the January bounce. Despite these expectations, Goldman is bullish on the technology sector and believes the digital economy and healthcare names will pick up the slack during this flat environment.

As the Nasdaq has gained 19.5% since its December low, any gain in the technology sector could help the index exit the bear market and enter into a new bull rally. Stocks rallied in January due to rising optimism about U.S.-China trade negotiations, as well as domestic monetary policy and dovish Federal Reserve remarks. U.S. trade deficit numbers were released this morning and showed an 11.5% decline in the gap, down to $49.3 billion from $55.7 billion. "Economists surveyed by Dow Jones had been looking for a deficit of $54.3 billion," CNBC reports. The gap with China itself closed down approximately 7%, from $38.2 billion to $35.4 billion. Economists and investors now look forward with optimism to the March 2 deadline for Presidents Trump and Xi to reach a trade deal.

Ned Davis Research's Ed Clissold suggests it will take more than Fed policy and optimism about trade for the market to hit the all-time highs it did in October of last year. "We have to get back to the idea of we need better earnings. We need better economic growth," Clissold said. Although companies are missing analyst expectations, stocks rallied in January because the earnings aren't the worst of what investors expected.

The IPO market is commonly used as a form of indicator as well. The IPO market is still expected to be strong in 2019 despite the delay caused by the government shutdown, according to MarketWatch. Bankers are confident that this year will be strong for deals. This outlook often coincides with markets being overvalued, as major companies move forward with their IPO plans in order to obtain premiums on their public offering.

Investors patiently await economic reports in order to formulate a more solid approach to investing for the year, but they have certainly enjoyed the significant January rally.

Sectors: The average momentum score for the Sector Benchmark ETFs increased from 14.27 to 28.18. Only two of the sectors remain "in the red"; however, each of the 11 sectors represented experienced an increase in momentum last week. Telecom and Industrials jumped from the middle of the pack to the top two positions. Both Technology and Telecom experienced a 23-point increase in momentum score, the largest increases out of the sectors.

Factors: Among the Factor Benchmark ETFs, the average factor score increased from 16.92 to 30.58. High Beta remains in the top spot as extra sensitivity to market prices is rewarded in positive momentum markets. Following High Beta is Small Size in the second spot. Growth overtook Value for the third spot on the list. The lagging factors continue to be Low Volatility and Yield.

Global: The average Global Benchmark ETF momentum score increased from 29.91 to 40.64 for the week. With earnings report season in progress, the USA had jumped to number seven two weeks ago and has now climbed to number six, overtaking World Equity. Latin America and China remain in the top two positions.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.