Market Report 1/4/2016

Market Report for week of January 4th, 2016.

This past Friday was the final trading session of 2015. It was an interesting year with plenty of ups and downs, but when all was said and done – the market closed essentially flat for the year.

Under the surface, it wasn’t a good year for many stocks, especially small caps. The “typical” stock didn’t fare so well and a large number were down significantly. All in all the best way to describe it was bifurcated. The NASDAQ was the only major index to post a respectable gain and that was mostly due to the FANG stocks. Even AAPL had a down year and it was one of the favorites going into 2015 – certainly the most widely-held disappointment.

Here’s the final look at how the Futures ended up for the year. Note the S&P Futures vary slightly from the actual SPX index.

YTD_eoy_2015

As we see and also knew, commodities got crushed. This was partly due to the Dollar strength but also the fact that’s it’s become fairly clear that the economy is likely in the midst of an “industrial recession”. There’s a lot to be concerned about going into 2016 and it remains to be seen if the market might be in for a rough start to the New Year.

It certainly was an ugly close to the year and the pattern on the daily chart has changed from a series of higher highs to lower highs.

I wanted to take a step back and look at the weekly SPX chart going back to the start of the Bull market. I’ve added notes so you will want to click the image for full-size.

SPX_W_12312015

There’s a lot going on with that chart but the one thing I wanted to point out is that the current pattern looks like it could be an inverse Head & Shoulders. But the market MUST break out to a new high to validate that. I’m not sure what the catalyst would be, but if it does break out we could get a significant move higher. However I’m approaching that with a “prove it” attitude. The market needs to prove it can go higher and take out the highs before I’m convinced we are still in a bull market.

Is the trend still up? Well that depends on the timeframe we are talking about. If you just look at 2015 on the daily, it’s not an uptrend. But on the weekly chart I pointed out that as long as it holds that major rising trendline it is indeed in an uptrend longer-term.

One of the key levels in my opinion is the August lows. If for some reason the market slips below that level it’s essentially in “bear market territory” as I note on the chart above. Notice the weekly RSI is trending down and the MACD is essentially at a “could go either way” juncture.

2015 was a year of failed predictions. Literally all the major investment houses started the year with price targets above where it closed. Not one of them suggested the market might be down on the year. If you include dividends the S&P 500 actually returned +2.2% so one could argue it kept up with CPI inflation. But I’d question whether it kept up with the actual cost of living.

Here’s a look at the 2016 year-end price targets of the major firms.

2015_2016_year_end_price_targets

It’s interesting that they appear a bit less bullish for 2016 and several have essentially pushed their 2015 targets to the end of 2016. Mr. Tom Lee of Fundstrat, the “most bullish analyst on the street” did exactly that. His 2325 target (not shown above) for 2015 has simply been extended to the end of 2016. The point is that none of these guys got it right so why listen to them now? A couple actually changed their year-end price target during the year. Goldman started off with 2100 and then lowered it to 2000 right near the 2015 lows.

Last week I joked that it was “future failed predictions week” on CNBC. One thing I learned last year is that none of these professionals have any idea what the market will do and the overall sentiment just drifts with the most recent price action. All year long it seemed like everyone got bullish near the tops – after a run-up and bearish near the lows – after the market had already gone down.

I almost expect that to continue and I have a pretty keen sense when it comes to the inflection points in sentiment.

As much as I’d like to like to go into the New Year optimistic there are problems lurking under the surface. First and foremost is that S&P earnings are not growing and revenue isn’t either. “They” said that earnings would grow and they didn’t. Street forecasts are always over-optimistic so take what you hear with a grain of salt. Much of what has held the market up is share buybacks and financial engineering. With QE over and the Fed at the start of a tightening cycle the longer-term viability of this bull market is in question. GDP is growing at roughly 2% perhaps less and there are some major dislocations out there, namely the price of oil.

2015 was dominated by Central Bank nonsense and Fed speak. There was way too much noise on that front and I can’t count the number of times where the day to day gyrations were attributed to investors perception over the timing for the first rate hike. I can assume that the talk will now turn to the timing of the second one. There’s an old Wall Street saying “three steps and a stumble” which means once the Fed gets to the 3rd rate hike the market could start having real problems.

Personally I think the Fed went ahead and raised rates in an effort to maintain credibility and not because the economy is so strong that the data said it was time. Recent data is not indicative of a robust economy.

I honestly can’t imagine the economy is strong enough to worry about a third rate hike anytime soon. One of the big “issues” last year that will likely carry over into this year is the “slowdown in China”. Along with worries over the Fed this was one of the most common explanations for market weakness. More than a few times I’ve pointed out that the drop in commodities was signaling “something ain’t right”. It’s the “global industrial recession” we have to worry about going forward. That and the fact the FANG stocks have p/e’s that are astronomical. It’s going to be interesting to see how FANG works out this year. It reminds me so much of the dot com era and we know how that ended.

Yes, there’s a LOT to be concerned about and I think it makes sense to be cautious going forward. Like I said, the market needs to prove it wants to go higher and it must do that by “breaking out” to new highs. Anything less and I’m skeptical. Now that could take some time so I’m keeping an open mind. It’s funny how last year proved both the bulls and bears wrong – it ended flat. We could get a pullback early on and still move up and break the highs at some point. We are headed into earnings season again and that could cause a bit of turmoil in the near future. Third Quarter earnings season was a disaster and I can’t recall seeing so many “blow-ups” among individual stocks in quite some time.

There have been plenty of signs that all is not well too. One look at the IWM Russell 2000 shows a totally different picture of things. A “robust” market is led by small caps and risk-taking. Other than short-lived periods of time, the small caps don’t paint a pretty picture. I suppose biotech stocks are somewhat a good indicator of risk appetite but they have been “mixed” as of late. All in all overall valuations are high and the leadership is narrow as we enter 2016.

I honestly don’t know what to expect and I could see it going either way. And of course as I always say, you can’t really discuss the market without first identifying the timeframe you are talking about.

With that said my objective is to remain objective and let the charts and price action guide me. Think about this – how many times did you hear “December is a seasonally strong month” or “the market always goes up in years that end in a 5”. All these “stats” are fun to ponder but guess what? A TON of the “seasonal stats” got blown out of the water last year and turned out to be totally useless. Last August was the worst in 11 years and the one before that was the best in 13 years. We just had a down year that ended in a 5 for the first time in 142 years. December was NOT seasonally strong. I could go on but you get the idea.

This year I vow to ignore most of the seasonality and “stats” about what the market has done in the past. I really think people make too much of it. I suppose the one that held up best was “sell in May and go away” but then there was no Santa Claus rally so buying back in for the historically strongest period wouldn’t have done much good.

I’ll be sure to take all that with a grain of salt this year and I’m not even going to get a copy of the Stock Trader’s Almanac. I say “trade what you see, not what you think”. Work with what is actually happening, not what you think will happen. I could argue a strong bull or bear case but in the end we really don’t know where the market is headed and quite honestly it doesn’t matter anyway for the most part.

That’s because I’m focused on trading individual stocks and you’ve heard me say it time after time. “The market is really a popularity contest where stocks and sectors come and go from favor”. That’s it in a nutshell. For the most part you can forget about fundamentals. As I pointed out recently on the shows I can show you stocks that have excellent revenue and earnings growth and low p/e’s and the stocks still get languish, move down or get crushed on no news. Meanwhile 3 of the FANG stocks have valuations they can’t hope to grow into and are priced like we’re in the midst of some sort of market mania. They are simply winning the “popularity contest” at this time. Just like Apple was this time last year.

So the idea here is that we will focus on the trees more than the forest. My mission is to find stocks we can trade for short-term gains, hit-and-run trading and “lock-in gains” when they are there. Along with that, the only way that I know to prevent a catastrophic loss in any one stock is to use a stop-loss. I’ve tried to keep the stops as tight as reasonably possible and sometimes that results in a string of stop-outs. But the alternative is holding a stock that’s down HUGE (I’m talking -25 to -50%) and I know for a fact that a lot of investors are sitting on losses like that right now in stocks they thought were good investments.

So as we get into 2016 we have a brand-new version of the “Research Lab” to kick things off. I decided to re-brand it and call it the Investing Systems Trading Service. The old name was ok but honestly a Research Lab sounds like a lot of work and I figured it was time for a change in name to go along with a change in platform. In 2007 when we originally built the old version when technology was a lot different than it is today. No one had tablets and very few were using MAC. It was time for a tablet and MAC friendly version and just an all-around upgrade.

I set out a couple months ago with the goal of streamlining and simplifying my “trading service” and I wanted to organize it better. I wanted to make it easier to use and navigate and ditch some of the old stuff no one was really using. So I started from scratch and built the version you see here from the ground up. I’m quite proud of it at this point. I know that people tend to be a bit resistant to change and it might take a little while but I can assure you that this new version will make it much easier to keep a flow of good trading ideas, chart setups and stocks that are set up to move. The back-end makes it so much easier to deliver timely trades and ideas and is a huge step forward.

Between the Chart Feed, the “official” Swing Trades and the 4 sections of “stock picks” you won’t find a better flow of ideas anywhere. As we start off the New Year I will be getting a lot more active with the ideas now that the structure is built. I’ll be adding Help videos and Strategy videos as we go to round out the content and help you get the most out of the service. As I mentioned recently, I felt as though 2015 was the year that the Live Show was the best part of the whole thing. A good majority of the best ideas were only presented on the shows and I know for a fact that only a small number of members are available to watch. So my goal was to bring a lot more value to the members that can’t watch and I think this new structure goes a long way toward that.

I still have some tweaks and there are a few things I’m looking to improve but the main thing is the charts, trades and stock picks. That is my main focus as we kick off 2016 and I guarantee I will bring you a TON of good trades and ideas this year no matter what the overall market does.

We start 2016 essentially “on the fence post” and things could go either way. I want to ease into the year cautiously and get a feel for what stocks and sectors might start “gaining in the popularity contest”. Things always change in the New Year as money rotates and we might see some strange behavior in the first few weeks of the year.

As I mentioned, my main goal is to remain objective and approach the market with an open mind and use the price action and the charts to guide the way.

I want to take this opportunity to wish you and your family a healthy, happy and prosperous 2016 and I will be here doing everything I can to help you out. I’m always here working behind the scenes on your behalf looking for constructive charts and good potential trades (and investments). I sincerely appreciate your support and will do my best to help you make money in the stock market in 2016.

Please join me for the live shows this week and we’ll work with whatever the market decides to do.

See you there!

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