Stocks End 2015 Mixed to Mostly Lower
Stocks ended 2015 mixed to mostly lower. The S&P 500, Dow Jones Industrial Average, DJ Transports, Small Cap Russell 2000, Mid Cap S&P 400, NYSE Composite all closed in the red. Meanwhile, the Nasdaq composite and Nasdaq 100 ended 2015 higher. The move in the latter two indices was largely due to big moves in a very concentrated area of the market that continues to lead (for now). For the year, the big (deflationary) take-away was that the huge multi-year bear market continued for a slew of commodities. In fact, nearly every major commodity in the world except for Canola, Cocoa and Orange Juice futures ended the the red. That typically is not a healthy sign for other asset classes, like U.S stocks. Remember these are not one-off declines. Gold and silver have been falling since 2011, Oil is down for the second straight year. A slew of other commodities like: Soybeans, wheat, sugar etc are all down for several years and in steep bear markets. All this clearly shows you that demand is waning across the globe. Looking forward, the bullish argument for stocks is twofold: 1. Valuations remain fairly attractive: Bull markets rarely end when the P/E ratio for the S&P 500 is 19 (the last few bull markets ended when the P/E ratio was in the 20’s). 2. Easy Money continues from global central banks. So far, we have never seen a bull market end with the Fed keeping rates at 0.25% and other central banks printing billions of dollars everyday to “reflate” markets. That doesn’t mean the bull market can’t end now – just that we haven’t seen it happen before. On the other hand, the bears argue that the bull market is nearly 7 years old and the market is forming a large topping pattern as leadership dries up. Both factors are classic signs of late-stage toppy action. What does all this mean for you? A defensive stance is prudent until more cards come out of the deck. We remain flexible and will be prepared for either scenario to unfold. If the major indices breakout of their year-long trading ranges (S&P 500 2,134) then odds favor we head higher. Conversely, if we break down below Aug’s low (1867), odds favor we head lower. Until then, we have to expect this choppy action to continue.
Monday-Thursday’s Action: Final Week Of Year Is Quiet on Wall Street
Stocks fell on Monday as concerns regarding the global economy resurfaced. Oil prices slid over 3% after jumping 9% in the prior week. The fact that oil prices are trading like a penny stock (wild swings, up and down) bodes poorly for U.S. stocks. In the U.S., the Dallas Fed manufacturing index plunged to -20.1 in December, missing estimates for -6.0. The index slid 15.2 points following the 7.8 point improvement to -4.9 in November. That was the lowest reading since May’s -20.8, and the index has been in contraction territory all year thanks to the oil-related recession. Furthermore, the index has not been above zero since December 2014. In other news, distressed debt levels jumped to the highest level since the Great Recession. The number of companies with the lowest credit ratings and negative outlooks vaulted to 195 this month which is the highest level since March 2010.
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Stocks rallied sharply on Tuesday after investors moved money into a slew of big cap glamour stocks. Amazon.com (AMZN) and Alphabet (GOOGL) broke out to new highs and have enjoyed very strong gains in 2015. On the economic front, the S&P Case-Shiller index rose by 0.9%, beating estimates for a gain of 0.6%. A separate report showed consumer confidence rose to 96.5, also beating estimates for 93.5.
Stocks were relatively quiet on Wednesday as oil prices fell over 3%. Just to put that move in the proper perspective, that translates to over 530 Dow points. Imagine the Dow swinging 500-1000 points a day. That is roughly what oil has been doing over the past few months. Remember, oil is in a steep bear market and wild swings (up and down) are common in bear markets. Elsewhere, Pending home sales fell by 0.9%, missing estimates for a gain of 0.5%. This was the third decline in the past four months. Stocks slid on Thursday which was the final trading day for the month, quarter and year. Stocks were closed on Friday for New Years.
Market Outlook: Aging Bull Market
This bull market is aging by any normal definition and will celebrate its 7th anniversary in March 2016. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. The fact that easy money is here to stay (for now) is all that matters. Everything else is noise. Eventually that will change, but for now the bulls remain in control. As always, keep your losses small and never argue with the tape.
