It was another roller coaster week for the stock market. The traditional pre-FOMC meeting drift higher turned into a surge only to be followed by a widespread collapse. The Federal Reserve raised interest rates for the first time in nine years. Stocks initially rallied on the news. Unfortunately the last two sessions have seen stocks get hammered. The Dow Jones Industrial Average has lost more than 500 points while the S&P 500 index has fallen more than -3.3% from Wednesday's peak.

Friday's broad-based sell-off saw the major indices plunge on huge volume thanks to Friday being a quadruple-witching expiration. That's when stock options, stock futures, index options, and index futures all expire on the same day. Friday was the second highest volume day of the year.

Crude Oil

Crude oil continued to sink throughout the week. By Friday oil was flirting with 12-year lows. WTI oil prices closed near $34.50 a barrel. Influential short seller Jim Chanos did not have kind words to say about the future of oil on Thursday when interviewed by CNBC. Chanos said that if he was a member of OPEC he would be pumping as much oil as possible today because 10 to 15 years from now it may not be worth much. Chanos believes that the alternative energies and electric-powered vehicles will eventually hit mainstream and slash demand for gasoline.

FOMC Meeting

The big event for the week was the two-day FOMC meeting that concluded on Wednesday. A week ago 80% of economists polled expected the Fed to raise rates. They were not disappointed. After being stuck in a range from 0.0% to 0.25% for seven years the Fed raise rates into the 0.25-0.50% range. Now that the Fed has begun raising rates the focus is how often and how fast will they raise rates.

This has caused some consternation in the market. The Fed's own dot plot survey suggests that FOMC members are expecting benchmark interest rates to be in the 1.4% to 1.5% by the end of 2016. Market participants are only expecting a rise to 1.0%. This seems inconsistent with the Fed's constant reminder to the market that the pace of rate hikes will be slow and gradual. A new poll by Reuters shows that most economists do expect the Fed to raise rates again in the next three months.

The Federal Reserve has raised interest rates 118 times in the last 67 years. 112 times the U.S. GDP was growing at more than 5.5%. They have never raised rates with growth this low (currently about 2.0-2.5%), which is causing some concern on Wall Street. A recent Bloomberg article noted another issue when the Fed starts raising rates. Looking at data over the last seventy years, the S&P 500 grows more volatile about 80% of the time the Fed raises rates. 2016 could be a rocky road for investors.

Economic Data

There was a lot of economic data last week. Housing starts surged +10%. The October number was revised slightly higher to 1.062 million. November's seasonally adjusted annual rate hit 1.173 million. Building permits also surged from an upwardly revised October of 1.16 million to 1.289 million in November. Meanwhile the NAHB housing market (sentiment) index inched lower from 62 to 61. Analysts had been expecting a small increase to 63.

The Markit services sector PMI reading fell from 56.1 in November to 53.7 in December. It was a new low for the year. U.S. industrial produce experienced its biggest drop in more than three years. The October number was revised lower from -0.2% to -0.4%. November's industrial production came in at -0.6%.

There were three regional Fed surveys. The New York Empire State manufacturing survey improved from -10.7 in November to -4.7 in December. The Philadelphia Fed manufacturing survey dropped from +1.9 to -5.9. That's a new low for the year and a long way from June's 15.2. The Kansas Fed manufacturing index fell from +1 to -9, hitting a new four-month low. This is the ninth reading in negative territory in the last ten months.

So the Markit services PMI is falling. Industrial production is plunging. The three regional Fed surveys are all in negative territory. It boggles the mind that the Federal Reserve said their decision to raise rates was data dependent when the data is clearly negative and has been for weeks.

Overseas Economic Data

Germany said their services PMI improved from 55.2 to 55.4 in December. Their manufacturing PMI also inched higher up to 53.0. More broadly the Eurozone said their industrial production for October improved +0.6% for the month and is up +1.9% year over year. Eurozone CPI slipped -0.1% in November. Their core-CPI was down -0.2%. This doesn't bode well since the region is trying to avoid deflation.

Japan reported that their manufacturing PMI for December was relatively flat at 52.5. The country also said their imports fell -10.2% from a year ago while exports declined -3.3% in November. Both readings were worse than expected. The Bank of Japan made headlines on Friday morning when they announced plans to buy 300 billion yen (about $2.45 billion) worth of stock ETFs as part of their massive QE program starting in April 2016. The BoJ also said they would lengthen the maturity of their bond buying program and buy more 7-to-12 year bonds. The Japanese stock market initially rallied on this news and then reversed sharply lower as investors realized this was less than previously expected. The market's negative reaction to additional stimulus is not a bullish signal for investors.

China reported that their retail sales for November rose +11.2% from a year ago. That was slight improvement from October. The country's industrial production rose +6.2%, up from +5.6% the prior month. CBB International, a private research group from New York, produces their own "Beige book" type of data on China. It's modeled after the Federal Reserve's beige book survey. CBB's beige book for China plunged to three-month lows. Nevertheless the Chinese market rallied last week. The Shanghai composite surged +4.2% in the last five sessions for its best one-week move since early November.

Major Indices:

The big cap S&P 500 index fell -0.34% for the week. That extends its 2015 loss to -2.59%. With only eight trading days left in the year we could end 2015 in negative territory. The index has clearly produced a bearish low higher. It's about to test its recent low in the 1,993-2,000 region. Last weekend I warned readers to look for a drop toward 1,990 before seeing an oversold bounce. The S&P 500 responded right on cue. Unfortunately, my crystal ball is pretty murky at the moment. If 1,993 breaks the next stop could be the 1,950-1,965 area.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite fared somewhat better only losing -0.2% for the week. Year to date the NASDAQ is still up +3.9%. It has also produced a lower high. The index ended the week on a four-month trend line of support.

I am surprised the NASDAQ held up as well as it did with its biggest stock, Apple (AAPL), having such a bad week. Last Monday Morgan Stanley downgraded AAPL on concerns about future iPhone sales. That sparked a week-long sell-off in AAPL with the stock plunging more than -6% for the week. AAPL is now in bear market territory, down more than -20% from its highs. The stock has lost more than $150 billion in market cap. To put that into perspective, the bottom 475 companies in the S&P 500 index are worth less than $150 billion each.

It's possible the NASDAQ bounces near last Monday's low at 4,870. If that level breaks it's tough to say where the next support level is. I'd look for a bounce in the 4700-4800 area.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index lost -0.2% for the week. Year to date the index is down -6.9%. The $RUT looks poised to test last Monday's low near 1,108 soon. I wouldn't be surprised to see it trade at the 1,100 mark, which should be round-number, psychological support. Unfortunately I would not trust the bounce. The short-term trend is bearish. The long-term weekly chart also looks bearish with its broken up trend.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index:

Economic Data & Event Calendar

The pace of data slows down for the holiday week. Most of the reports are all jammed into Wednesday. After last week's FOMC meeting I doubt any of these economic reports will make any waves in the stock market.

The U.S. stock market closes early on Thursday (Christmas Eve) at 1:00 pm eastern. Both the U.S. and European markets are closed on Friday for Christmas.

- Monday, December 21 -
Chicago Fed national activity index

- Tuesday, December 22 -
U.S. Q3 GDP estimate
Existing home sales

- Wednesday, December 23 -
Personal income & spending data
Durable goods orders
University of Michigan consumer sentiment
New Home Sales
Canada GDP estimate
EIA oil inventory data

- Thursday, December 24 -
Christmas Eve (stock market closes early at 1:00 pm ET)

- Friday, December 25 -
Christmas (U.S. and European markets closed)

Additional dates to be aware of:

Jan. 1st - New Year's Day (market closed)

Looking Ahead:

If you thought 2015 was a tough year for trading you are not alone. Mutual fund managers have had their worst year in the last two decades. About 77% of funds have missed their benchmarks. Hedge funds have not fared any better. In the first nine months of 2015 there have been 674 hedge funds that have closed down. 257 of them were shuttered in the third quarter.

The weekly AAII investor sentiment survey has soured. The most recent numbers show bullish sentiment down to 23.9%. Neutral sentiment retreated as well at 36.8%. Bearish sentiment surged +9.5% to 39.4%.

A Slowing Global Economy & Plunging Commodities

The global economy is still struggling. One key metric to follow is shipping rates to transport dry goods. The Baltic Dry Shipping Index has plunged to new lows at 477. That's a big drop from 2,337 in 2014 and a light years away from the 11,973 high back in 2008.

Chart of the Baltic Dry Shipping Index

Plunging demand for commodities doesn't help either. The CRB commodity index ($CRB) fell to 41-year lows last week. Part of this decline has been the strength of the U.S. dollar. Most commodities are priced in dollars so a strong dollar buys more. The dollar can't be blamed for all of this decline. 40-year lows for commodities is deflationary.

Chart of the CRB commodity index

Market Outlook

Normally the market would be in rally mode by now. Investors would be betting on a Santa Claus rally between now and year end. That is looking less likely at the moment. It's possible the big sell-off on Thursday and Friday was just a delayed reaction to the FOMC decision to raise rates and fund managers squaring away positions in front of quadruple witching option and futures expiration on Friday.

I cautioned investors last week that the stock market could see a lot of fireworks (i.e. volatility) surrounding the FOMC decision. Technically the market looks vulnerable to more selling. Many of the large trading desks on Wall Street have closed up shop for the year. Volume is going to decline over the final two weeks of trading. I want to be optimistic here but my outlook is neutral. There are still opportunities for investors but we probably need to be patient and let the dust settle from last week's violent moves.

~ James