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Analysts are split on a retest of the Christmas Eve lows, but agree stocks face headwinds

Scott Gamm
Traders Gordon Charlop, left, and Tommy Kalikas work on the floor of the New York Stock Exchange, Friday, Feb. 8, 2019. Stocks are opening lower on Wall Street as a mixed bag of earnings reports didn't inspire investors to get back to buying stocks. (AP Photo/Richard Drew)

The stock market has yet to retest its Christmas Eve low of 2,351 in the S&P 500 (^GSPC), reached on Dec. 24, 2018.

Retests are a common occurrence during times of volatility.

During the stock market selloff of February 2018, the S&P 500 retested its low toward the end of March and again in April. During the October 2018 selloff, stocks tested their lows again in November, before reaching even lower lows in December.

“The retest of those lows last year, which we did right on schedule, occurred because of the ferocious speed of the decline, which statistically had in the past always been followed by a retest,” said Adam Robinson, president of Robinson Global Strategies, in an email to Yahoo Finance. “The big problem now, the economic elephant in the room, is the failure of longer term global yields (10Y and longer) to rise despite a decade of the most aggressive and coordinated central bank stimulus efforts.”

Characteristics of a healthy economy include rising economic activity, increasing loan demand and rising inflation, Robinson said. “But we’re seeing the opposite of all of these,” he noted.

Robinson thinks global equity markets still face strong headwinds “despite the ferocious bungee-jump-snapback short-squeeze rally off Dec. 24's near two-year lows.”

The S&P 500 is up 14.2% since Christmas Eve.

“The classic ‘V-bottom’ off the December 24 lows and subsequent rally, which retraced two-thirds of the 20% decline off the late-September all-time highs, is either a rally within a bear market or the launch/resumption of an ongoing bull market, and a Bayesian probability analysis I did over the past half-century put the odds at 4/7 that it was the former,” Robinson added.

After all, according to Robinson, bear markets always have ferocious bounces.

Trade talks

In addition to the headwinds Robinson mentions, the market also faces a big test surrounding trade talks, an issue that has disturbed global markets over the past year.

The Trump administration has set a March 2 deadline to reach a resolution on trade negotiations with China and on Thursday, President Trump announced he would not be meeting with China’s President Xi Jinping before then.

“[That’s] Definitely concerning as I think a trade deal is the biggest market drive,” wrote Peter Tchir, head of macro strategy at Academy Securities, in a note to clients. “[It’s] hard to see a lot of reasons (any reasons) to own risk if we heading towards more tariffs and entrenching the trade war.”

Another near-term worry surrounds earnings. Wall Street is now forecasting a decline in year-over-year earnings growth for the first quarter of 2019.

Though one factor suggesting the market isn’t likely to retest its Dec. 24 lows in the coming weeks is the historical market patterns that typically follow a strong January.

Historically, when the S&P 500 rises 6.1% or higher in January (which it did this year), February and March are higher 75% of the time with an average gain of 1.3% and 1.5%, respectively, according to analysis conducted by DataTrek Research.

“The only tried and fast rule is that we have never been down for the year after a very strong January,” said Nick Colas, co-founder of DataTrek Research. “So if there is a retest then that should be bought.”

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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