The market is pushing higher this morning after last week’s selloff. There are lots of reasons for last week’s events: GameStop, Robinhood, hedge funds in a short squeeze, and the list goes on. Again, as long as the HCM-BuyLine® is positive, all pullbacks are considered times to buy.

We do expect intermediate-term indictors, tracking multi-month shifts, to continue to peak, and a turn down could be in the cards during this first half of 2021.Weekly momentum indicators for the S&P, Russell 2000, EAFE and EM equity indices, along with the EM currency index and copper have peaked and turned negative from overbought levels. The technical backdrop continues to suggest a Q1 pullback/pause is underway that will likely last through most of Q1. 

Short-term trading indicators are becoming oversold, supporting another upside bounce.China tightening repo rates, along with hedge funds collapsing both long and short market exposure, sent risk assets lower over the past week, pushing most short-term trading indicators toward oversold levels. An oversold trading bounce is beginning to develop from first support at the 50-dma for the S&P 500, fueled by reports suggesting the bulk of HF de-grossing is in place and expectations for China to inject liquidity into their holidays. 

The ISM Manufacturing Index fell 1.8 points in January to 58.7, below the consensus of 60.0, as factory activity moderated somewhat at the start of the year. Still, that was only the second pullback in the index since last April, and the level remains close to its highest since November 2018, consistent with continued expansion in manufacturing output and the economy. Of the 18 ISM industries, 16 reported growth, matching the largest share since mid-2018. The breadth of the expansion also supports continued gains in manufacturing output.

The ISM estimates that the index corresponds to 4.4% annualized growth in real GDP. We estimate a slower 3.8% pace of growth, in line with continued but slower economic recovery, compared to the early months after reopening. The January decline in the ISM Index was led by slower new orders and production growth. Inventories accumulated at a slightly slower pace. But employment increased for the second straight month, although firms reported difficulties in hiring and retaining workers. Supplier deliveries continued to slow, amid supply chain issues and bottlenecks.

Among other individual indicators, export order growth moderated, but import growth picked up. Order backlogs hit the highest level since June 2018, a sign that firms are experiencing some capacity issues, exacerbated by short-term shutdowns for sanitization, increased absenteeism, and other staffing difficulties. On a positive note, a growing net share of firms reported their customer inventories were too low, which bodes well for future demand and production.

The ISM Price Index rose 4.5 points to 82.1, its highest level since April 2011, as material costs accelerated significantly, signaling supplier pricing power. This level of the Price Index is historically consistent with rising consumer price inflation as well. A record-matching 47 commodities rose in price, and a record 12 were in short supply.