Market outlook

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.

 


AD LINE

 

 

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.

 

dow theory

 

 

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!

comment

15 Comments

  • Your assessment is comforting that we should generally see positive returns if we are in the right sector.
    Today oil took a big hit currently sitting below $38.
    Did you expect this turn down?
    Beyond the normal supply and demand issue that exists is there any current issue that has caused it to drop $5-$8 in the last week or so?
    Which way do you see oil going in the next short while?
    There are some high beta energy stocks (Baytex comes to mind) that have dropped significantly today largely due to crude and nat gas uncertainty. If you felt that the oil trend was back upwards then some of these high beta energy stocks could yield nice returns in the coming weeks/months.
    Thanks

    Reply
    • I thought that oil would find support at its old March 2015 lows of $38. By today’s action (December 8) it appears that support level is in danger–although we should wait a couple of more days to see if this is just a blow-off spike before drawing conclusions. So, my take is to wait a week, and if WTI falls for a few more days you could see $34/$35–and if that fails then look for the low-mid $20’s.
      I’ll cover that in a blog soon.
      Right now–the idea is to wait and see for the next week or so – the market will tell us where traders are stepping in.

      Reply
  • Hi Keith,
    Being relatively new to technical analysis, I am currently using TD’s basic platform for charts and wonder if you have recommendation(s) for an alternate chart provider? I find TD charts can show large discrepancy especially when a stock experiences significant swings in one day.
    S

    Reply
    • I use http://www.stockcharts.com –paid subscribers get much longer dated charts
      I also like http://www.freestockcharts.com – they have a free and a paid subscriber setup. The paid gives you better chart lists and a few other features, but the free version gives you plenty of data history. I use the paid stockcharts service and the free version of freestockcharts, and find everything I need between them.

      Reply
  • Great Info Keith. One of my large bias’s for sticking mainly with equities is the average outperformance of equities seasonally between Nov and May via Don Vialoux which you reference. Other points you bring to attention are very insightful. Could this sideways pattern be a precursor before heading down? I’m torn as i can see both directions ahead. So far it looks like the 10 week (50 day moving average) is being supported. With rising rates in your opinion are sectors like Utilities worth holding? I only have 1 H.TO but wondering if that position is better filled with another sector. Thanks.

    Reply
    • Carmine you bring up an important point–the big MA’s –I favor the 200 day myself–should support the market. Its certainly that case now.
      I don’t hold utilities at this time – although I have some exposure to pipelines, which is largely unpleasant!

      Reply
  • Great article — and Speaking of Pipelines — ENB is getting really hit since its peak in mid October — is this just a reaction to commodity price declines……? Its held up relatively well this past year…

    Reply
    • Yeah its ugly. Seasonally the sector does ok this time of the year–normally.

      Reply
      • Tax loss selling is likely in action too.

        Thanks Keith for you comment the other day … yes great coffee in Vancouver: 49th P, JJBean (single origins), Revolver (if you like paying 5 bucks for a brew) …

        Reply
  • Hi Keith,
    I have a position in BCE around $56.60. Would you recommend adding to BCE at the current price? I still have more room to add some. Thanks.

    Reply
  • Keith,

    Do you read anything into 20 and 50 day moving averages along with the 200 day moving average? Does it make any difference to you if the 200 day moving average is still being supported and in an uptrend but the 20 or 50 day moving average has broken or in a flat/downtrend? I know seasonality plays into it depending on the type of stocks. Thanks.

    Reply
    • the most important thing to watch is the 200 day /40 week/10 month average. A short break below it is not the end of the world, but a sustained break is bad news

      Reply
  • As a long term investor, I tend to watch the weekly charts closely and to watch the 13 week and the 43 week EMAs. Interestingly, the S&P 500 13 week EMA broke below the 43 week EMA just four times in 20 years – first in November 2000 (and stayed below for 30 months), second in June 2008 (for 15 months), third in September 2011 (for 3 months) and this year in September (for just over 2 months). The 13 week EMA returned over the 43 week EMA on November 16th.
    What does all this mean? Is the route over? I might add the S&P/TSX offers a completely different story.

    Reply
    • Fred–the TSX is the dogs breakfast. next week I am going to write a blog on why I don’t favor Canada
      The S&P has been sideways for the better part of a year (since Feb)–thus, most MA’s become less useful in this environment. Now is the time to look at momentum studies–RSI, stochastics, ROC, MACD etc

      Reply

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