By Don Ames, Sarasota Family Office Association

January is behind us and what a month it was!! The major indices all struggled as the month came to an end. The Dow Jones Industrial Average “DJIA” ended the month down 2.04%, the S&P 500 fell by 1.11% while the Nasdaq had a slight gain of 1.42% at the end of January. The first week of February saw stocks roar ahead as both the Nasdaq and S&P 500 both reached record levels. This one week reversal was quite surprising. At the end of January, both the S&P 500 ETF (SPY) and Transportation Index ETF (IYT) each closed below their respective 50 day moving average. Historically, this has been a bearish warning sign signaling a correction was approaching. Remarkably, in a one week period spanning January 29 through February 5, the VIX declined by nearly 37%!!

Last Friday’s Nonfarm Payroll Report showed the economy slowing as 49,000 jobs were added last month. The U-3 unemployment rate dipped to 6.3% thanks to 406,000 Americans exiting the workforce. The U-6 rate, a broader measure of the employment picture widely followed by economists, fell to 11.1%, down from 11.7% one month ago. Meanwhile, the closely watched labor participation rate fell to 61.4% last month due in large part to the 406,000 people who left the workforce in January. As a reminder, the next 2021 monthly employment report will arrive on March 5.

The first Fed meeting of 2021 took place January 26-27 and the Fed made clear that near zero interest rates will be here for the foreseeable future. As of February 5, the 10 Year US Treasury ended trading with a yield of 1.17%. A number of market strategists are now concerned about the rise in interest rates as the US national debt is now over $27 trillion. Higher interest rates should negatively impact the US budget deficit and could hamper the strong homebuilding sector, a real bright spot for the US economy in 2020.

Gamestop and other heavily shorted stocks recently made headlines as large hedge funds suffered enormous losses on their short positions. In a move blasted by many small investors, several brokerage limited trading in Gamestop and other heavily shorted stocks. As a result, the share prices of these stocks fell markedly enabling short sellers to cover their positions. Many retail investors complained that several large hedge funds actually touted their enormous short positions prior to the short squeeze. This caused an explosion in the share prices of many of the heavily shorted stocks. Numerous retail traders read about these large short positions thanks to being exposed by Reddit’s Wall Street Bets blog.