Stocks ended 2015 with a whimper. It was another holiday-shortened week and traders were in a selling mood the last couple of sessions. The prior week stocks were up +2.5%. Last week they reversed lower with -0.8% declines among the big caps and -1.6% declines for the small caps. All of the major U.S. indices posted declines in 2015 with the exception of the NASDAQ composite.

The pullback last week was relatively widespread. Transportation stocks lost -1.5%. Semiconductor stocks fell -1.6%. Banks slipped -1.4%. Housing stocks were down -1.3%. Crude oil continues to be a market mover and oil bounced +1.5% on Friday but still posted a -2.75% decline for the week. Oil closed at $37.13 a barrel. The weakness in crude fueled a -3.0% plunge in oil stocks.

Market Drivers in 2015

There were a lot of big stories in 2015. The U.S. Federal Reserve's decision to raise rates was one of the biggest. All year long the Fed kept threatening to raise rates. They finally did so, after years of keeping the fed funds rate near zero, the Fed raised rates in December by 25 basis points (to the 0.25-0.50% range). The funny thing is that the Fed promised their decision to raise rates would be data dependent. They raised rates in December as economic data was declining and the U.S. manufacturing sector is in recession and corporate earnings are falling. Current forecast suggest U.S. GDP only grew +1.3% in Q4 while inflation is virtually nonexistent in the U.S. The data doesn't support a fed rate hike but they did it anyway.

Central banks around the world were definitely market movers. Japan continues with their massive QE program as they desperately try to jump start their economy and fight off deflation. Meanwhile Europe is showing signs of improvement after the European Central Bank launched their version of QE in early 2015. China's government has also been very active as they try to prevent their economy from crashing. Chinese growth is down to the slowest pace in years even after the government devalued their currency twice and is actively trying to stimulate growth.

Crude oil was another major story for the market in 2015. Crude oil fell -32% in 2015. That followed a -47% drop in 2014. This pressured energy-related stocks lower with the group down -23% for the year. For a good portion of 2015 the slide in oil was an industry-specific problem. Eventually it started affecting the whole market. It got to the point that if oil was down then stocks were down. The impact of low oil prices drove significant volatility in the high-yield debt markets, which crashed to five-year lows.

Of course it wasn't all bad news in 2015. There was massive levels of corporate stock buy backs. Plus it was a record-breaking year for M&A deals. Yet overall it was a tough market to trade. Fund managers had their worst year in nearly two decades with 77% of funds missing their benchmarks.

Market Performance in 2015

The sell-off in the last two days of 2015 left the S&P 500 with a -0.73% decline for the year. That is excluding dividends. The S&P 500 has a yield around 2.0% so with dividends it was the seventh year in a row with gains. Excluding dividends it was the first down year since 2011. It was also one of the flattest.

The S&P 500's -0.7% decline in 2015 is only one of four times in the history of the index where it closed the year with a change of 1% or less. The most recent incident was 2011 where the S&P 500 lost a miniscule -0.002%. The most memorable decline in recent memory was 2008 where the S&P 500 fell -38.5%. Here's an interesting tidbit, for the last 140 years, the stock market always posted a gain in years that ended in "5". 2015 broke that trend. There is some good news - we haven't seen back-to-back annual losses since 1981 and most analysts are optimistic for 2016.

Here's a quick recap of 2015's performance:

S&P 500 = -0.73%
NASDAQ composite = +5.7%
Russell 2000 = -5.7%

S&P midcap = -3.7%
S&P small cap = -3.3%

NYSE biotech index = +10.9%
Consumer discretionary = +8.4%
Basic Material stocks = -10.0%
KBW Bank index = -1.59%
Energy stocks = -23%

Throughout the year there were constant complaints about the lack of leadership and how narrow the rally was. Five stocks accounted for a large chunk of the NASDAQ's gains. The large cap NASDAQ 100 index ended 2015 with a +8.4% gain. That was thanks to the F.A.N.G. stocks. These are Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (Google's parent company, GOOGL).

Facebook (FB) = +33%
Amazon.com (AMZN) = +118%
Netflix (NFLX) = +132%
Alphabet/Google (GOOGL) = +46%

Interestingly, the most widely followed stock in the world, and the biggest by market cap, Apple Inc (AAPL) did not have a good year. AAPL closed down -4.6% year to date and is down -21% from its 2015 high (bear-market territory).

Asian and European markets fared better than the United States.

France (CAC40) = +8.5%
Germany (DAX) = +9.5%
Japan (NIKKEI) = +9.0%
China (Shanghai) = +9.4%
It's worth noting that China was up +50% earlier in the year.

Emerging markets fell -17% in 2015.
The MSCI All-World index lost -4.2%

The U.S. bond market saw a minor loss. The yield on the 10-year note rose from 2.17% to 2.269% by the end of 2015. (FYI: the German 10-year bond yields 0.6% and the Japanese 10-year note yields 0.26%)

Economic Data

It was a quiet week for economic data. Consumer Confidence for December improved from 90.4 to 96.5. That was better than expected and snapped a three-month decline. The Case-Shiller 20-city home price index rose +5.5% in October. That's on top of the +5.5% gain the prior month.

Unfortunately the Midwest region is not looking so hot. The Chicago-region Purchasing Managers' Index (PMI) dropped from 48.7 in November to 42.9 in December. Economists were expecting a rose to 50.0. Numbers below 50.0 suggest economic contract and December was the lowest reading since summer 2009.

Overseas Economic Data

There wasn't much data from Europe last week. Spain reported their consumer price index (CPI) for December fell -0.3%. That was worse than expected. Year over year their CPI is flat (0.0%). They would like to see inflation in the 2% region. Italy reported their producer price index (PPI), which is a wholesale-level inflation gauge, fell -0.5% in November. That's down -3.3% from a year ago.

Japan released lot of numbers before the yearend. Their national CPI for November was up +0.3%. Household spending fell -2.2%, which helped account for the -1.0% drop in retail sales in November. Meanwhile Japan's unemployment rate rose from 3.1% to 3.3% in November, which was slightly worse than expected. The country's industrial production for November dropped -1.0%.

China continues to see slower economic growth. Industrial profits for November dropped -1.4% and marked the sixth monthly decline in a row. This weekend the country's official manufacturing Purchasing Managers' Index rose from 49.6 in November to 49.7 in December. It was the fifth month in a row this was below the 50.0 mark, which separates growth from contraction.




Major Indices:

The S&P 500's -0.7% decline last week left the big cap index beneath its 50-dma, under its 200-dma, and below potential support at 2,050. Last week's performance also generated another lower high. If the recent trend is any guide then we could see the S&P 500 drop back toward the 2,000 area. Actually it could go lower if it's building a bull-flag consolidation pattern (see chart).

Daily chart of the S&P 500 index:
%IMG1%

Weekly chart of the S&P 500 index:
%IMG2%

Monthly chart of the S&P 500 index:
%IMG3%

The NASDAQ composite lost -0.8% last week. That shaved its 2015 gains to +5.7%. It has also produced another lower high. However, you can also see on the daily chart that the NASDAQ still has a bullish trend of higher lows. It's currently testing support near this trend line and the 5,000 area (also bolstered by its 200-dma). A bounce from here would be encouraging. A breakdown probably means it will retest support near 4,900 and likely lower. You could argue the NASDAQ has built a bearish head-and-shoulders pattern over the last couple of months. Keep an eye on the neckline.

chart of the NASDAQ Composite index:
%IMG4%

Weekly chart of the NASDAQ Composite index:
%IMG5%

The small cap Russell 2000 index underperformed last week with a -1.6% decline. The index is down -5.7% for the year. You can see on the weekly chart that it has clearly broken its long-term up trend. The daily chart is not any better and it looks like the $RUT is building a bear-flag consolidation pattern. If the sell-off continues I would not be surprised to see the $RUT retest its lows near 1,080.

chart of the Russell 2000 index
%IMG6%

Weekly chart of the Russell 2000 index
%IMG7%



Economic Data & Event Calendar

It's a very busy week for economic data. It's the beginning of the month and investors will be eager for clues on the fourth quarter. The ISM, out on Monday, will likely show a contracting U.S. manufacturing sector. The ADP Employment report is expecting a decline from +217,000 private sector jobs to +190,000 in December. This sets up for the jobs report on Friday where analysts are forecasting +200,000 new jobs. The unemployment rate is expected to remain unchanged at 5%, a seven-year low.

The Federal Reserve will release the minutes from their pivotal FOMC meeting on December 15-16th. Wall Street will be gleaning it for clues on the Fed's pace to raise interest rates in 2016. The are multiple Federal Reserve presidents speaking throughout the week and you never know when one of them might say something market-moving.

It's also worth mentioning that CES will likely make headlines later in the week. The annual Consumer Electronics Show (CES) takes place from January 6-9th in Las Vegas. Over 170,000 people will attend.

- Monday, January 04 -
Caixin China manufacturing PMI
Germany CPI
Eurozone PMI
Construction spending
ISM index
U.S. Markit manufacturing PMI data

- Tuesday, January 05 -
German unemployment
Auto & Truck sales

- Wednesday, January 06 -
Eurozone services PMI
ADP Employment Change Report
Factory Orders
ISM Services index
FOMC minutes from December 15-16th meeting

- Thursday, January 07 -
Eurozone unemployment rate

- Friday, January 08 -
German industrial production
Nonfarm payrolls (jobs) report for December
Unemployment Rate
Wholesale inventory data

Additional dates to be aware of:

Jan 18th - Martin Luther king, Jr. Day (markets closed)
Jan 27th - FOMC policy update
Feb 15th - Presidents Day (markets closed)
Mar 16th - FOMC meeting, updated forecasts
Mar 16th - Fed Chairman Yellen's press conference
Mar 25th - Good Friday (markets closed)

Looking Ahead:

The week ahead launches a brand new year of trading. Everyone is out with their forecasts for 2016. After a frustrating and flat 2015 most market pundits are feeling optimistic for 2016. Multiple analysts are predicting +8%-10% gains in the year ahead. However, there are several warning that the second half of 2016 could sour. They're still forecasting gains but the impact of the 2016 presidential election could influence investor sentiment.

If you were sick of hearing about the Federal Reserve and their plans for interest rates in 2015 then I have bad news for you. The Fed will remain a major story in 2016 and the focus will move from if the Fed raises rates to how fast the Fed raises rates. There are some market veterans that believe the Fed may have to reverse course and cut rates again if the U.S. economy slows down too fast in 2016.

Stories to Watch in 2016

I've already mentioned the Federal Reserve. A lot of investors believe that European stocks will continue to outperform the U.S. this year. The Fed plans to raise rates while the ECB is still in the middle of its QE program, which it just extended recently. Investors (and thus stocks) love QE.

Iran's nuclear program could be a major story in 2016. The country continues to defy the U.N. and the West on developing its missile program and its nuclear capabilities.

The Syrian conflict will remain a major story. It will be interesting to see if Russia continues to defend Syrian President Assad. The current Syrian migration into Europe and the U.S. will make headlines.

The Islamic State (ISIS) will continue to export terror around the world. It's only a matter of time before another Paris-style terrorist attack hits another major metropolitan area. Terrorism will be a major story both around the world and for the U.S. 2016 presidential race. The threat of terrorism could also have an impact on the 2016 summer Olympics in Rio de Janeiro in Brazil this year.

Bloomberg put together a list of key events for the year ahead. You can check it out here.

Seasonal Trends

Last week I talked about how December is normally the strongest month of the year but 2015 was proving to be an exception. Well January is also one of the best months of the year for stocks but there are no guarantees. You'll likely hear market reporters talk about the January Effect. Stocks that were sold in December for tax-loss purposes could be seen as bargains in January. Small caps normally outperform in January as well with fund managers optimistically betting on names they believe will outperform in the year ahead.

Traditionally January is seen as a signal for the year ahead. So goes January so goes the year. According to the Stock Trader's Almanac this January signal can correctly forecast the yearly direction 75% of the time. Unfortunately the Stock Trader's Almanac also notes that the 8th year of a presidential term has been down five of the last six occurrences. The average loss is almost -14%.

Here's some good news. According to the Wall Street Journal, when the S&P 500 closes flat on the year the following year nearly always delivers a rally and often a double-digit return. So take your pick on which forecast you want to believe.

The latest investor sentiment survey might suggest the trading public is tired and cautious after last year's performance. Last week's AAII investor Sentiment Survey showed bullish sentiment falling -1.3% to 25%. Bearish sentiment fell -7.9% to 23.6%. Neutral sentiment soared +9.2% to 51.3%. That's extremely high neutral sentiment. No one wants to stick their neck out and pick a direction. The long-term average is only 31% neutral sentiment, 30% bearish, and 38.7% bullish.

AAII Investor Sentiment
%IMG8%

I am also neutral on the stock market. Last week's action would suggest the short-term trend is down. It wouldn't surprise me to see additional selling in the week ahead. However, I am also optimistic that many of the concerns of 2015 are over. After a year of disappointing earnings growth companies should see easier year over year comparisons. We could see the bull market resume and climb the wall of worry. I would be patient for the major indices to find support again and then look for an entry point.

~ James

Happy New Year 2016
%IMG9%
2016 Cartoon by Gary Varvel