I’ve noted in the past that making predictions regarding market levels and future market events (corrections, bull markets, bottoms, tops…whatever) is a waste of time. You and I as technical analysis followers must be trend followers. We don’t know the future, but we do know how to identify a trend. We also know how to identify risk/reward measurements that could cause us to lean towards caution or aggressive market positioning. But we shouldn’t become too focused about making correct market predictions. That’s a mugs game.
So, rather than write a blog on what my predictions for 2016 are, I thought I’d look at a few facts – both positive and negative. You can weigh them, draw conclusions from them, add to them, or just acknowledge them as interesting tidbits with no predictive qualities. Your choice. Here they are:
On the plus side
- Seasonality is typically strong at this time of the year. Ignore at your own peril the 60 years of market data showing an overwhelming tendency for markets to be positive between November and May.
- Employment, GDP growth and other fundamental figures are improving in the USA (not so much for other parts of the world). Meanwhile, rates remain low (climbing, but not aggressively).
- Bull markets tend to move in trends that last many years. The last two mega bull markets (1951 – 1966, and 1982 – 2000) were indeed double-digits in length. We moved into a secular bull market in 2013 after the decade long high on the S&P500 was taken out – I’ve written on this subject before. This suggests a continuation of the bull market until the mid-2020’s or beyond.
- The US Fed is going to raise rates. Rising rates are good for the stock market. Here’s some evidence to that statement.
- Cumulative breadth (AD line) is flat along with the S&P500 – chart below, courtesy www.freestockcharts.com. This indicator shows no divergence in the big picture view of breadth.
- Europe is stimulating – which can be bullish for their markets, and US markets.
- Faster moving market breadth indicators are Ok. For example, % stocks over the 200 day MA is trending flat but a bit low (52%), while % stocks over the 50 day MA is decent (65%) flat. Chart not shown.
On the negative
- Dow theory tenant of index confirmation between transports and industrial stocks is showing bearish divergence once again by the transports. Chart below.
- 2015 will be the first year since 2009 that S&P500 profits have declined year over year—largely due to commodity stocks.
- China—a major contributor to demand, is slowing. As are emerging markets.
- Valuations (PE ratio trailing, and Shiller PE) are at the higher end of historic norms.
- Continued soft commodity pricing (energy, base metals) will affect emerging markets like Brazil and Argentina, and Russia – which puts pressure on their credit, which may (or may not) put pressure on worldwide stock markets.
- A continued strong USD can put pressure on their exports.
My take on all of this
It’s evident that markets are in a transition phase. The S&P500 has been trapped below 2130 for the better part of a year. Yet, there are stocks and sectors that continue to move up – albeit for briefer periods of time than they used to. Technical analysts can take advantage of these changes by rotating through sectors. Case in point: we earned a double digit (net of fees) rate of return in our equity platform for clients this year in this flat market. We accomplished this by rapidly buying and selling stocks and sectors, and raising cash when needed. Our portfolio turnover was 260% so far for 2015 – this is about 4 times that of the average Portfolio Manager (according to Morningstar) !!! But, in a sideways environment, such activity is a necessity in order to profit. You and I as technically driven traders can seek to profit no matter what happens over the coming months.
I’d encourage you to add your own input, observations and indications to the above factors in the comments section below. I really do like to hear from other technically driven investors, and what they are looking at. I certainly don’t have all of the answers – and love to hear about other factors that I may not have considered. Share your thoughts below!