The year 2015 went out with a thud with the Dow, S&P and Russell ending with a loss for the year. This has prompted many analysts to predict a 2016 rally with some forecasting Dow 20,000.
There were plenty of reasons for a range bound market in 2015. The Fed kept warning they were going to raise rates all year but waited until December to actually do the deed and remove the uncertainty. The U.S. economy rebounded from a very weak 0.6% GDP in Q1 but the rebound faded to a minimal +1.3% growth forecast for Q4. Manufacturing went into contraction in the middle of 2015 and is just now returning to growth.
Earnings declined -4.7% in Q4 with revenue down -3.2%. Crude prices dipped to $33.98 in early December and a post recession low that killed the energy sector and the equity markets. High yield debt crashed to a five year low also dragging the equity markets lower.
The Chinese economy continued to decline with the government manipulating their currency twice and rocking the world currency markets. Terror events, ISIS, the Syrian civil war, Russia moving in to prop up Assad and begin bombing rebels supported by the U.S. coalition. Russia's plane bombed by ISIS, Paris terror attacks followed by San Bernardino and now almost weekly warnings of new threats.
The average gain for the S&P in the 7th year of a presidential cycle is +10.4%. That clearly did not happen with the Dow struggling to a -2.33% loss for the year. The S&P flirted with gains but lost -0.7% for the year after the market plunge over the last two days. This was the first negative year for the Dow and S&P since 2008. On the bright side, there have not been back-to-back consecutive losses since 1981. However, another long-term trend has ended. This was the first loss in a year ending with a 5 in 141 years.
Santa Claus Rally Ran out of Air
The flat market was not worldwide. The French market gained +8.5%, China +9.4% and Japan +7.3%.
The biggest Dow gainers were Nike (NKE) +31%, McDonalds (MCD) +26% and Home depot (HD) +26%. The biggest gainers on the Nasdaq were Netflix (NFLX) +139%, Amazon (AMZN) +122%, Activision (ATVI) +96%, Nvidia (NVDA) +67% and Verisign (VRSN) +55%.
The Nasdaq Composite was the third strongest index with a +5.73% gain. The Nasdaq 100 ($NDX) was second with +8.43% and the Biotech Index was the strongest at +10.9%. The Nasdaq was not without its losers with Micron (MU) losing -59%, Western Digital (WDC) -45%, Viacom (VIAB) -45%, Storage Technology (STX) -44% and Bed Bath & Beyond (BBBY) -36%.
Mutual funds had their worst year since 1998. Goldman Sachs (GS) said 74% of large cap mutual funds are trailing the S&P-500 after 85% trailed in 2014. Warren Buffet posted his worst performance since the recession. Hedge funds closed at the highest rate since the recession.
The good news from 2015 is that despite all the bad news I listed above the markets actually closed flat on the year. They shook off all the bad news and while the Nasdaq finished positive the -0.7% loss on the S&P was a rounding error caused by the low volume plunge on Thursday. Volume for the last three days of trading averaged about 4.8 billion shares.
The seasonal trend for the last two days of December to be weak was the only trend that really came true. All the others were ignored. That same end of December trend is normally followed by a rebound in the first two days of January. Late next week the real trend for January should emerge. The last two January's have been bearish but the prior three were strongly bullish. Let's hope the pendulum swings back in the bulls favor.
Last year was one all the major analysts got wrong. Only one analyst in the graphic below under estimated the year-end print for the S&P. That was David Kostin at Goldman Sachs. Kostin actually revised his target down from 2,100 after the August flash crash so back in January he was also over shooting the mark. In his revision he warned that earnings were declining, oil was continuing to be a major drag as well as the strong dollar. He recommended "buying U.S. stocks with a high percentage of U.S. sales, strong balance sheets, generous dividends and robust share buyback plans."
After missing estimates so bad in 2015, what are analysts calling for in 2016? The good news is that not a single analyst is calling for a bear market. Numerous analysts are calling for more than a 10% rally in 2016 with most expecting it in the first six months.
The average S&P price target for 2016 is 2,215 (+8.4%) with Tony Dwyer at Canaccord the highest at 2,360 or a 15.5% rally from Thursday's close. Dwyer believes the dollar will no longer be a headwind for equities since the Fed expectation has now given way to reality of a measured pace of 3-4 hikes in 2016. Without the strong dollar earnings will rise along with commodities especially oil and copper. He pointed to the performance of commodities in the rate hike cycles in 1994 and 2004 as history likely to repeat.
Other analysts point to the future hikes from the Fed and the continued stimulus from the ECB and Japan as negatives for the dollar. Under those conditions, the dollar should strengthen against the euro and yen. Dwyer believes those factors are already in the market and the slow pace of the Fed hikes will allow the dollar to finds its level at somewhat lower than it is today.
John Stoltzfus at Oppenheimer agrees with Dwyer that the two biggest pressures on the U.S. market in 2015, oil and the dollar will reverse in 2016 and allow earnings to increase and equities to rise. His estimate is for 2,300 at the end of 2016.
Since WWII, the S&P has closed flat within 3% of the prior year close ten times. In the year that followed the index gained an average of 12.8% and rose 80% of the time. Only in 1947-1948 was one flat year followed by another.
In the fourth year of a presidential election cycle the S&P has gained an average of +6.1% since 1948 and has gained 76% of the time. In addition, the Russell 2000 has gained an average of 10.9% and rose 78% of the time since 1980.
Earnings are expected to decline -4% for Q4 and revenue -3%. If that happens full year 2015 earnings will be negative for the first time in 6 years. Full year 2016 estimates are for growth of 8% with revenue up 4.5%. The Q4 earnings cycle will begin in three weeks and most of the year-end volatility should be over before then.
Oil prices are expected to make a low in the March-April timeframe and then rebound slowly to $50-$55 by year-end. However, the worst is over for major earnings declines in the energy sector. Oil prices have been in the $35-$50 range for last quarter and we are now 18 months into the decline cycle. While energy equities may continue to be volatile, the huge earnings declines should be behind them. The bar has been set very low and most companies are in conserve mode today and not spending any more money than they have to in order to keep the doors open. They are just passing time until oil prices begin to firm. Without the constant decline in energy prices, the equity market should firm. The energy sector was 18% of the S&P and now it is only 11% because of the sector decline. When oil does begin to firm around mid-year the sector could lead the market in the last half.
Biotechs were the star performers in 2015 with the index up +10.9%. There is no reason for that trajectory to change. Dozens of novel new drugs are in the pipeline and new discoveries are being made almost weekly. M&A in the sector will continue to be strong. There will be some disasters when a specific drug fails to meet its end point in a trial but they will be limited compared to the gains in the overall sector.
There will probably be some selling in the sector in January as profits from 2015 are captured and investors rotate into different stocks. I would use any January dip to add to positions in the sector.
There were no economic reports of note on Thursday. However, next week is entirely different. The ISM Manufacturing report on Monday is likely to show another month of contraction so that will be a sentiment item for the market. The ADP Employment on Wednesday is expected to show a decline from +217,000 to +190,000 as holiday workers are terminated.
The Nonfarm Payrolls on Friday are also expected to see a minor decline to 200,000. The number of new jobs needs to remain over 200,000 for the Fed's economic theory to remain viable. Last week we saw a spike in weekly jobless claims from 267,000 to 287,000 and the largest weekly number since February. However, this is more than likely related to seasonal workers being laid off again.
The only splits announced last week were reverse splits to keep the companies from being delisted from the exchange. Those were OptimumBank (OPHC) and Mechel Steel (MTL). These are not tradable.
For the full split calendar click here.
Apple (AAPL) lost more than $29 from its April high at $134.50 for a -21.7% decline. It was a major drag on the Dow of about -224 points and a major weight on the Nasdaq. This is not likely to get better over the next several weeks. I recommended on Tuesday that the spike to $109 was a new shorting opportunity. The decline from the highs erased $57 billion in market cap.
On Thursday, Apple was sued for allegedly slowing down the iPhone 4s with the new IOS 9 operating system. The suit claims the software renders the 4s nearly unusable and forces the users to spend hundreds of dollars upgrading to a newer iPhone. I think Microsoft has been doing this with Windows for years. Every update slows the PC even further eventually forcing you to buy a new PC with a new Windows version. I am surprised nobody sued Apple for this in the past.
Analysts continue to slash sales estimates even though Tim Cook said projecting sales based on supplier shipments was flawed. If Q4 sales come in as analysts expect it will be a huge earnings miss for Apple. If sales come in as Tim Cook has led us to believe, at a new record, there will be a lot of disappointed shorts.
The key here is that Apple is likely to continue lower until earnings on January 17th. Since Apple is a big stock in the Nasdaq and Dow it could hold those indexes back. Apple closed at a four-month low on Thursday.
McDonalds (MCD) was the second best performer in the Dow in 2015. Most of those gains came in the last three months after they rolled out the all day breakfast and changed their menu again. They appear to be on a roll and there are new concepts coming.
They closed the largest McDonalds in the world last week. The 12,000 square foot store had a PlayPlace, bowling lanes, an arcade, animated robots and other attractions. This store was in Orlando Florida and was a tourist attraction for families headed for Disney World. The store was open 24 hours a day, 365 days a year. The store was closed to make room for a new 19,000 square foot store that will include several self-serve kiosks so customers will not have to talk to a real person, along with some new attractions.
In Hong Kong, McDonalds is opening a "food bar" styled restaurant with a "Create Your Taste" platform that allows customers to customize their salads and sandwiches. This is similar to a Subway where the food is prepared by workers behind a glass partition and you tell them what you want as your food moves down the preparation table. There will also be touch screen menus. This new type of store is called McDonalds Next.
McDonalds recently opened the "Corner by McCafe" in Sydney Australia. The restaurant serves healthy offerings, including tofu and vegetables. No Big Macs or fries to be seen. Instead, the menu includes salads along with Moroccan roast chicken breast, chipotle pulled pork, brown rice, pumpkin, lentil and eggplant salads and sandwiches.
The times are changing for McDonalds and as these ideas catch on we could see an entirely new McDonalds emerge in the USA.
Crude oil was a significant market driver in 2015. If oil was up the market was up and falling oil meant a falling market. That should work in our favor in 2016 since oil is very near a bottom. When inventories begin to pile up starting in January we should see crude drift lower. The inventory accumulation cycle ends April-May as refiners switch over to summer blend fuels and move to almost 100% utilization as they build gasoline inventories for the summer driving season.
During the inventory build cycle we could see prices dip briefly under $30. This will create so much pain for the producers they will be forced to shut in some production rather than sell it for such a small amount. The discount to WTI in the Bakken was as much as $8 recently so $30 WTI means they are only selling their oil for $22. The $30 level for WTI is the "off switch" level where production should slow significantly as producers hold production for higher prices in the future.
Most of the drilling being done today was committed in 2014 and early 2015. Very few new projects are being funded. The EIA expects U.S. production to decline -570,000 bpd in 2015 as prices continue to fall.
I said oil would be a positive influence on the 2016 equity market. Unfortunately, we have to get past the next three months before that will become a factor. Once it appears oil prices have bottomed, we should see equities rise in advance of the actual rally in oil prices.
Short covering ahead of year-end gave crude a little boost on Thursday but it was negligible. We could have one more EIA report on Wednesday with a decline in inventories for tax purposes but once into January the barrels will begin to flow. The graphic below from OilSlick shows the oil inventory gains and losses for Dec-Jan 2015. Note the decline in the last two weeks of December to avoid taxes but then the huge surge once we moved into January. The 413.1 million was a multi month high at the time but inventories continued to rise to 490 million barrels by April. Once inventories began to decline in May, the pace was fairly rapid.
The wild card here is the recent lifting of the 40-year ban on crude exports. The first tanker of U.S. crude left a Texas port on Thursday headed to Italy on the Theo T tanker. The crude was sold by ConocoPhillips to Vitol which routed it to Italy. Enterprise Product Partners said last week they would load 600,000 barrels in Houston for export next week. We do not know how this new export factor is going impact the inventory picture in the weeks ahead.
Active rigs declined by only 2 rigs last week but given the holidays I am surprised there was any activity at all. Oil rigs declined -2 to 536 and gas rigs were unchanged at 162.
Once we are in 2016 we could see some capex budgets shift and whether that means another drop in rigs or some going back to work is unclear. Nearly all producers have slashed capex for 2016 and with oil at $35, there is no reason to burn cash drilling holes you are not going to complete until 6-12 months from now.
We could get a market boost next week from what is called the January Effect. This is when stocks that were sold off to lock in tax losses in December are bought by investors at lower prices in January. There is also the normal bounce in the small caps as funds put year-end retirement contributions to work.
Ryan Detrick at Kimble Charting Solutions noted that of the 500 S&P components 301 were down -10% from their highs, 175 were down at least -20% as of December 30th. While the overall market has been weak since August the FANG stocks (Facebook, Amazon, Netflix and Google) were up +35% and together they accounted for 5% of the S&P gains.
Jeffery Saut said the individual investor is in hibernation. The S&P moved at least 1% on a daily basis in either direction 72 times in 2015 and that is the most since 2011 according to Standard and Poor's data. Some 48% of our daily volume is from high frequency trading.
The Stock Trader's Almanac says the January direction predicts the direction of the market for the year with a 75% accuracy rate. We need a positive January to give investors some confidence to come back into the market.
While 2015 finished in the red for the Dow and S&P the indexes were not down much and they are still close to their recent highs. It was not a horrible close for the year.
However, the closing numbers are somewhat deceiving. The S&P may have been down only -0.7% but it is -4.3% or -93 points off the highs. That could easily be recovered in a couple weeks of bullish gains but I would not count on it over the next two weeks. We still need to finish up with the January tax selling where investors held over into the new tax year to take gains.
The S&P chart is showing a series of lower highs and lower lows and without a move over 2,100 it will remain a bearish trend. Actually, we need a move over 2,138 to a new high to convince the hard-core bears.
On the weekly S&P chart the Fibonacci lines from the 2009 low show a 1.618 retracement at 2,137 on the S&P. While everyone was watching to see what happened when the S&P crossed 2,000 the hard-core technical chartists were watching 2,137. The S&P moved right to it multiple times but never crossed it. Some believe this is the market top and we need to have a prolonged period of selling before that top can be broken.
The S&P is up more than 200% since those 2009 lows at 666. There have been three mini corrections along the way but you have to admit the vertical ascent is remarkable. With PE multiples approaching 20 there needs to be a period of price consolidation before the market can move higher according to the chartists.
However, remember the numbers I quoted earlier about the 500 S&P components, 301 were down -10% from their highs, 175 were down at least -20% as of December 30th. We have had a rolling correction since August that was hidden by the performance of the top ten Nasdaq big cap stocks, which lifted the indexes despite the decline in the broader market.
The daily chart has been bearish since the lower high failure on December 1st at 2,104. We have been chopping around between 2000-2080 for most of December. Friday's sharp decline was troubling even though the last couple days of December have a seasonal tendency to be weak. I went back five years and the weak days were only a handful of points compared to Thursday's -19 point decline.
The easy forecast would be a simple look at the chart ignoring all the macro factors. I call this the 5th grader view. If you are ever confused about market direction, ask a 5th grader if the chart is going up or down. They have no preconceived ideas about market direction, earnings, Fed meetings, GDP, the Chinese economy, etc. They will just look at the chart and "Gee Dad, I think it is going ____" without even knowing what symbol you are charting.
As adult investors, we sometimes get hung up with our directional bias without realizing it. That can be expensive because we trade our bias rather than the charts. We trade the hope rather than the facts.
I laid out the analyst thesis earlier in this commentary but that is long-term rather than the next several weeks. We need to put our 5th grader hats on and focus on the charts rather than the forecast.
The 5th grader view is that the S&P chart is bearish. That could change at the open on Monday and the first two days of January typically see big moves. That means we need to let the smoke clear before we start betting on direction for the year.
The S&P closed on light support at 2,043.94 with stronger support down at the 2000-2005 level. Resistance will be the recent intraday high at 2,080 and then 2,105.
The Dow chart is slightly more bearish than the S&P because of the longer series of lower highs dating back to May. The Dow saw a boost over the last two weeks because of the buying in the Dogs of the Dow. That cycle should begin to fade once we are into January. The Dow stocks are international stocks and the earnings worries will begin to weigh on them as we approach the start of the Q4 cycle in three weeks. The dollar was still a factor in Q4 and sales will have been impacted.
GE remains the sleeper stock of the bunch with a positive chart and a pending breakout over $31 to a new high. GE management is making all the right moves and they expect to return $32 billion to shareholders in dividends and buybacks from the sale of assets from GE Capital. This has maintained support under GE shares when the rest of the Dow was falling apart.
Chevron and Exxon could be a continued drag once oil prices begin to sink again. Nike could provide some lift once the post split depression wears off. Apple will of course be a drag until earnings.
The Nasdaq has been supported by the FANG stocks and biotechs. The +10% gain in the biotech index was a major support for the Nasdaq. The index is not that far away from its highs and could see a rebound from year-end retirement contributions.
The 4888-4900 support is still the material level to watch. The close on Thursday at 5,007 was one point below support at 5,008. That is close enough for me but any decline at the open immediately targets that lower level.
The Nasdaq 100 remains the stronger of the tech indexes and is only about 125 points below its closing high. A week of decent daily gains could push it right back to that level pretty quickly.
The Russell chart is probably the most bearish. The big decline in December was not followed by a decent rebound like the one we saw in the other indexes. The Russell began to collapse in late June and only recovered half its losses from the September low. The Russell closed the year with a loss of -5.7%.
The small caps appear to be out of favor because the late December rally never appeared and it is hard to see a normal January rally at this point.
The Russell 2000 is in correction territory after a high close in June at 1,296 and a -161 point (-12.4%) decline from that level. We are not going to make new highs on the big cap indexes with the Russell 2000 in correction.
It will also be hard for the Dow Industrials to surge higher with the Dow Transports deep into correction territory with a 17.8% loss for the year. Slowing truck and rail shipments plus profit worries at the airlines are weighing on the index. It is also hard to see how the U.S. economy is going to avoid recession with the transport sector tanking.
The NYSE Composite Index ($NYA) is also telegraphing a bearish outlook. The index is small cap heavy with plenty of energy stocks to weigh it down. A break below Thursday's close at 10,143 would be another lower high and we could easily see a retest of 9,600.
If we put our 5th grader hats on the charts are telling us the market is weak. While January is typically a strong month, there are never any guarantees. We need to trade what we see rather than what we want to see. If you do not have a desperate need to make a trade this week I would recommend waiting to see what the market gives us before committing to a direction. The first two days can be volatile and the rest of the week tends to be a settling process into new positions.
While nobody can accurately predict market direction, the long-term trend is always up with an 8% annual average. Now that the Fed has started hiking rates, the uncertainty is gone. Europe and Japan are increasing stimulus in an effort to accelerate their recoveries. After a year of dormancy, it would make sense for investors to bet on equities. With the Fed hiking rates, the bond market should be seeing continuous outflows back into equities. We know treasuries are going to be losers in a rate hike cycle so there is no alternative other than investing in equities or holding cash.
With the Nonfarm Payrolls on Friday and the Fed in hike mode, those numbers will be even more important. Be patient. There is always time to trade as long as you have capital to invest. If you miss an entry on the stock you want, be patient. There are 4,500 stocks. Another opportunity will appear.
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The web is full of all kinds of end of year articles and I listed the best ones I found in the comments below. Some I did not post were really out there and there were some with no basis in fact whatsoever. Enjoy!
Here is the 2015 market in ten points from Mohamed El-Erian. He said saying stocks had "their worst year since 2008" only tells a tiny part of the story. Ten Market Thoughts
MarketWatch posted an article by Matthew Lynn on five black swan events that could rock the market in 2016. Five Black Swans
Business Insider posted an article with 15 events they believe will happen in 2016. Things like "Iran will cheat on the nuclear deal" to "China will become unstable over the South China sea." 15 Probable Events for 2016
According to the Stock Trader's Almanac the 8th year of a presidential term has been down 5 of the last 6 times it has happened with an average loss of -13.9%. Wow! Let's hope that historical trend is broken severely.
"Never make predictions, especially about the future." Yogi Berra.
Investor sentiment surged into the neutral camp at 51.3% as of the close on Wednesday. Bearish sentiment declined -7.9% and bullish sentiment fell -1.3%. Neutral sentiment spiked 9.2% to 51.3%. Clearly, the majority of investors are unsure about what January will bring.
Enter passively and exit aggressively!
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"Trying to catch falling knives always results in lost fingers. Better to let the knife hit the floor, bounce around a little and when it stops moving go pick it up."
Mark Yusko. Morgan Creek Capital Mgmt.