Bullish & Bearish Case For Stocks in 2016
Stocks rallied sharply last week, led by beaten down areas (energy, materials, transports, etc) that bounced from deeply oversold levels. Not much changed last week as the same underlying conditions, we have outlined for you in recent months, continue to exist beneath the surface. The S&P 500 is back to breakeven for 2015 and the best trade of the year has been a counter-trend mean-reversion trade. Meaning, short the index when it is in positive territory and buy it when it dips into negative territory. This year has been an anomaly because most years we see the market trend (either up or down), rarely does it finish flat the year. The last time it was flat for the year was 2011 and that led to a strong 2013-2015. The big difference was that in 2011, the bull market was only two years old and it is turning 7 in March 2016. Clearly, we are very late in the game. That doesn't mean the bull market has to end, just that odds favor we are getting closer to the inevitable end. The bullish argument is twofold: 1. Bull markets rarely end when the P/E ratio is 19 for the S&P 500 (the last few bull markets ended when the P/E ratio was in the 20's) and 2. We have never seen a bull market end with the Fed keeping rates at 0.25%. That doesn't mean the bull market can't end now - just that we haven't seen it happen before. On the other hand, the bears argue that the bull market is nearly 7 years old and the market is forming a large topping pattern as leadership dries up. Both factors are classic signs of late-stage toppy action. What does all this mean for us? We remain flexible and will be prepared for either scenario to unfold. If the major indices breakout of their year-long trading ranges (S&P 500 2,134) then odds favor we head higher. Conversely, if we break down below Aug's low (1867), odds favor we head lower. Until then, we have to expect this choppy action to continue.
Monday-Thursday's Action: Stocks Bounce From Deeply Oversold Levels
Before Monday's open, stock futures were up by over 100 points and that led to a nice open on Wall Street. However, the buying didn't last and stocks turned negative by mid-day after several important areas of the market turned negative. To help offset China's slowing economy, Chinese leaders said they intend to make monetary policy more "flexible" as the government prepares more stimulus measures. This may become a major shift in the easymoney period we have seen from global central banks. China's Central Bank, The People's Bank of China, is entertaining the notion of removing its benchmark deposit and lending rates. Instead, the Central Bank, will create an "interest-rate corridor" to guide borrowing costs after policymakers scrapped a deposit-rate ceiling in October. Never a dull moment in Central Bank land.
Stocks rallied nicely on Tuesday as the pre-holiday bump continued and investors digested the latest round of mixed economic data. The government said U.S. GDP rose by 2% in Q3 2015, beating estimates for a gain of 1.9%. Weaker data emerged from the housing market. Briefing reported that existing home sales fell by -10.5% to a seasonally adjusted annual rate of 4.76 million, missing their estimate of 5.30 million. The big drop followed a downward revision to sales in October from 5.36 million to 5.32 million and was the first time since January-February 2014 that existing home sales have declined in two consecutive months. Finally, the big drop in November left existing home sales down -3.8% from a year ago, which is the first year-over-year decline since September 2014. Energy and material stocks led Wall Street higher as they bounced from deeply oversold levels.
Before Wednesday's open, investors digested a slew of economic data. Durable goods orders were flat (unchanged) in November, beating estimates for a decline of -0.5%. U.S. personal income increased by 0.3% beating estimates for a gain of 0.2%. In the 12 months through November, the personal consumption expenditures (PCE) price index rose by 0.4% after rising 0.2% in October. Core prices, which exclude food and energy, rose by 0.1% after being unchanged in October. Meanwhile, U.S. consumer spending grew by 0.3% last month after a flat reading in October. Consumer sentiment came in at 92.6, barely topping estimates for 92.0. Finally, new home sales came in 490k, missing the Street's forecast for 503k.
Stocks were quiet on Thursday after jobless claims fell to a 42-year low and Wall Street closed at 1pm EST. Stocks were closed on Friday for Christmas.
Market Outlook: Aging Bull Market
This bull market is aging by any normal definition and will celebrate its 7th anniversary in March 2016. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. The fact that easy money is here to stay (for now) is all that matters. Everything else is noise. Eventually that will change, but for now the bulls remain in control. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market - Join FindLeadingStocks.com.
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