What to Expect Trading the First Day, Week and Month of 2018
- December is historically the most sanguine time of the year as liquidity drains and motivation for breakouts and trends subsides
- Historically, January doesn't offer up a dramatic volatility return according to VIX seasonality; but S&P 500 suggests differently
- While recent history points to volatile Januaries, we should take both seasonal and structural conditions to plot 2018's open
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December has fulfilled seasonal expectations for a speculative 'risk on' lean with a dramatic reduction in both volatility and liquidity. Now, as we head into 2018, should we expect more of the same or will the new year ring in a reversal for conditions? Between the systemic retreat in activity in the financial system over the past years and the onset of year-end holidays, there were clear expectations across the trading rank for activity to fizzle out while market benchmarks stretch to record extremes. Neither longer duration investors nor shorter term traders are comforted by the way these markets have unfolded. For investors, the concept of value has been replaced by sheer momentum - more speculative than most are comfortable with. Traders are happy to take advantage of persistent buying on dips, but the swings are coming smaller and smaller and the balance of influence towards this group is creating a sense of instability even among those whose focus is on short term charts. It is clear that markets are quiet beyond what seasonal conditions warrant. So, will the turn of the year and the natural rebound in market participant prove the occasion to turn the tide?
There are many assets and views that make up the broader market, so we focus on the S&P 500 as an ubiquitous instrument from the world's largest financial market. It also happens to be one of the best performing benchmarks, so if it were to continue the march higher or capsize, the course would likely be followed by the rest of the world. Taking a look at the opening day, week and month of each year going back over the past three decades, there is some statistical consistency; but the focus should be in activity rather than direction as structural issues unbalance seasonal norms. First and foremost, the opening day of the trading year is rarely the trigger for a sudden return of liquidity and volatility. The 'hangover' references often made are more likely a reflection of the time it takes to reestablish positions for large market participants and the revival of dominant fundamental trends. That said, there are examples from the recent past that defy the average. The open to 2016 for example saw an extension of a tentative reversal through the end of the previous month that developed into a steep dive through the subsequent week and ultimately month.
Opening weeks of new trading years frequently see an increase in activity through both volume and volatility. That does not insinuate a specific direction; but there is a natural positive correlation between volume and volatility; and an inverse correlation between volatility and the performance of risk assets like the S&P 500. What has proven more remarkable than even the stretch for equity indices these past years is the retreat in volatility and volume. Given the depths of complacency in the market, the most important feature of the landscape may very well be this combination of elemental considerations. In other words, an influx of either or both is likely to trigger a change in tack in the form of direction. What would happen if we have another January like that of 2016 where volatility picked up as the S&P 500 slid? Would the intensified extremes of our market over the past few years translate into a reversal that builds into a systemic reversal? We discuss what to expect through the opening day, week and month of 2018 with unusual seasonal and structural considerations in this weekend Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.