Putting 2015 in Perspective and Looking Ahead
It is my sincere hope that everyone enjoyed the holiday season and took some time to get away from the blinking lights for a week or two. But now it is to time to hit the reset button and get to work, for 2016's game is about to begin!
As we enter another new calendar year (which, by the way, will be my 30th year being responsible for other people's portfolios) the markets couldn't be more conflicted. Concerns about global growth, Fed policy, the U.S. manufacturing sector, earnings, inflation, and the state of oil's ongoing dive appear to be the focal points as we enter 2016.
For the macro crowd, the current myriad of uncertainties coupled with a fresh calendar means it is time to place your bets on (a) what will transpire on each front and (b) how the markets will react.
The problem - well, at least for me - is that even if my crystal ball wasn't in the shop and I was able to somehow predict when oil's decline will end, when the economies of China and Europe will perk up, and how many times the Fed will raise rates in 2016, I have little-to no confidence that I could ALSO predict how the markets will react.
Although the allure of making the big macro "call" remains strong in the wake of the 2008 debacle (and I'm fairly certain that the movie, "The Big Short" will inspire legions of investors to try and make a big call for 2016), getting that call right remains difficult at best.
Consider that the hedge fund industry, which is all about getting those big calls right, had one of the worst years on record in 2015. There have been many examples of high profile hedgie managers getting their heads handed to them last year, including media darling Bill Ackman. According to published reports, Pershing Square's flagship fund was down more than -20% for the year late in December.
2015: It Was Tough Out There
Which brings me to my first point on this fine Monday morning: Please do yourself a favor and stop worrying about the money you didn't make in 2015.
You see, the bottom line is that calendar year 2015 was rough - really rough.
Although there wasn't a big, bad decline such as those seen in 2001-02 or 2008-09, 2015 wound up being a VERY difficult environment to make money - anywhere.
After zooming up and down and back and forth, the S&P 500 wound up losing -0.73% last year. The Dow was down -2.23. And the usually dependable small-caps didn't work as the iShares Russell 2000 ETF (NYSE: IWM) dropped -5.85%.
Oh, and in case you've been living in a cave, commodities were crushed in 2015. The commodity index ETF (NYSE: DBC) was down -27.6%. And unfortunately, bonds were no panacea.
As a result, asset allocation didn't have a good showing either last year. Morningstar's Conservative Allocation category sported a loss of -2.31%, the World Allocation category was off -4.17%, and the Tactical Allocation Category fell -5.95% (apparently trying to make ANY moves in the market backfired). In other words, almost everything declined a bit in 2015 - and there was really nowhere to hide.
Armed with this information, it is important for investors to be able to admit that 2015 was a tough year. In short, 2015 was a year where "losing the least amount possible" was the goal.
So, before you pick up the phone and fire me or any other investment manager, you should recognize that this is just the way the game goes sometimes. Remember, in the investment business, returns come in bunches -- and not in a nice, steady stream each year that all those mutual fund mountain charts would have you believe.
For example, investors probably made big returns in 2013 as the S&P was up nearly 30% on the year. And from the July/August low of 2011, my calculator and my weekly chart of the S&P suggests the S&P was up about 80% in early 2015.
The point is that when viewed from the proper perspective, the declines seen in 2015 aren't a reason to be overly upset - it's just the way things work from time to time.
But Wait, There is Hope for 2016!
In looking ahead, most Wall Street firms are projecting that 2016 will be a continuation of the low-growth difficulty that was seen in 2015. However, as you may know, Wall Street's "experts" aren't any better at predicting the future than anyone else.
According to a study of Wall Street strategists done by Birinyi Associates, the 22 strategists surveyed have forecasted single-digit returns for the stock market in 2016, which is the same forecast they've had for each of the last five years. And yet, the S&P 500 has put up double digit gains in four of those five years!
In addition, Ned Davis Research Group tells us that 2015's "weak results" are actually a very good reason to be hopeful for 2016. Wait, what?
In a recent report, entitled "2016 Global Market Outlook - Expect a Strong Year for Global Equities," NDRG's Tim Hayes points out that since 1941, the median gain for years following a weak calendar-year return when a secular bull market has been in play has been +26.8%!
This is by no means a consensus opinion. In fact, predicting a strong year in 2016 flies in the face of the fears regarding the economy, oil's impact on the debt markets, corporate earnings, China, etc. But this, my dear readers, is also what makes up the proverbial "wall of worry."
Recall also that the stock market has been following the 2011 script to a "T" since the beginning of 2015. And if this pattern continues, the outlook, while likely to be bumpy, is pretty solid.
So, while I'm not big on predictions, it IS awfully nice to see one of the most respected firms in the country looking for a good year in 2016.
But now it is time to get back to the matter at hand. So, let's hit the reset button this morning and get back to business.
Turning to This Morning
Stocks are tanking worldwide on this first trading day of 2016 in response to a massive sell-off in China and fresh geopolitical issues in the Middle East. In China, a fifth consecutive month of weakness in the manufacturing data caused traders to flee, triggering circuit breakers when the Shangai index fell 7% intraday. The Shenzen market closed near levels seen last in February 2007. Next, oil is rallying this morning on renewed geopolitical concerns in the Persian Gulf. Saudi Arabi severed diplomatic toes with Iran over the weekend in response to the storming of its embassy in Tehran. Bahrain also cut ties with Iran. The response in the equity markets has been a sharp selloff. European markets are down more than 2% across the board , Dow futures are down nearly 300, and S&P futures are currently trading down more than 1.6%. So, buckle up as it looks like 2016 is going to get very bumpy, very fast.
Today's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -2.68%
Crude Oil Futures: +$0.38 to $37.39
Gold: +$11.40 at $1071.60
Dollar: higher against the yen, lower vs. euro and pound
10-Year Bond Yield: Currently trading at 2.227%
Stock Indices in U.S. (relative to fair value):
S&P 500: -33.10
Dow Jones Industrial Average: -273
NASDAQ Composite: -87.40
Thought For The Day:
A fanatic is one who can't change his mind and won't change the subject. - Winston Churchill
Here's wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Global Growth
2. The State of Corporate Earnings
3. The State of Global Central Bank Policy
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Negative
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 2015
- Key Near-Term Resistance Zone(s): 2105
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Negative
- Price Thrust Indicator: Neutral
- Volume Thrust Indicator(NASDAQ): Negative
- Breadth Thrust Indicator (NASDAQ): Neutral
- Short-Term Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Neutral
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Neutral
- Intermediate-Term: Oversold
- Market Sentiment: Our primary sentiment model is Negative
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Neutral
Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.
Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.
Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.
Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is nit registered as a broker-dealer.
Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.
Advisory services are offered through Sowell Management Services.