US equities get off to a poor start

US equity markets kicked off the New Year with a bang but it wasn’t the move that many traders were expecting. Having initially opened higher on the day the Dow 30 sold off and fell by as much as 500 points falling below 30,000. The index had an intraday range of 792 points but did close back above the round number, though it was down by 1.30% on the day.

The broader-based S&P 500 index lost 1.50% in Monday’s session as did the technology-focused Nasdaq 100 and Nasdaq Composite indices. US Small and Midcap stocks also gave ground the Russell 2000 index falling by 1.50% and the S&P 600 Small-Cap index losing -1.10%.

Overall Monday’s performance marked the worst start to the trading year for US equities in two decades. The moves appeared to have wrong-footed many retail traders who had been buying equities ahead the holiday period.

Yesterday’s falls also pushed up volatility gauges with the VIX index, which is said to measure levels of investors fear and greed, rising by 18.50%. Its biggest move since December 21st. The higher the index rises then the more fearful or risk-averse equity markets are said to be.

The VIX has risen by just under 30% in the last month despite US equity markets moving higher throughout November and December. Historically equity volatility has moved inversely to US equity indices so those moves are notable. Other volatility indices including those for gold crude oil and Euro FX also made gains yesterday and have done so over the last 5 trading days as well, according to data from Barchart.com.

Heightened volatility was a contributing factor in the bumper profits enjoyed by many margin trading brokers in 2020. A performance which has been reflected in the share prices of the quoted companies. IG Groups shares are up by 26.0% over the last 52 weeks, Plus 500 shares are up by 66.55% in the last year, whilst CMC Markets has seen its stock rally more than 173% over that time.

So can we or should read anything to the weak start that US equities kicked off 2021 with? In terms of overall market performance for the balance of the year, day one, returns are not a particularly accurate guide it seems.

There have been 18 occasions on which the Dow has lost 1% or more on day one but on only seven of those occasions did the index finish the month in the red. That’s a hit rate of around 40% which is approximately the ratio for losing years when the index finished down on day one.

It’s a similar story for the S&P 500 which has seen 12 day one falls of 1.0% or greater but has gone on to finish the month and the year lower on only 5 occasions, a ratio of around 42.0%.

The Nasdaq Composite index has higher hit rate however and has finished lower for the year and the month 57% of the time when it had a negative first trading day of the year according to data from Dow Jones and Marketwach.com.

Margin traders can probably expect to see markets gyrate in the run-up to Joe Biden’s inauguration on January 20th and those moves will likely equate to heightened trading volumes, and if 2020 is any guide, to additional profitability in the early part of the year.