Stock market review of 2015 and a peek into early 2016
This year saw the end of the bull market which started in 2009 with stocks mostly trending sideways in the US. The E-mini S&P daily chart below shows how we are now trading at exactly the same levels we saw in January, when we peaked at 2062. We did of course make a new all-time high at 2134 in mid-May, and traded mostly sideways into the mini crash in August. Since then, conditions have become much more volatile, but over the last month or two we have lacked direction.
With no patterns or trends to gauge future direction, I’m not even going to try to guess where markets will be heading in the beginning of 2016. I honestly have not got the faintest idea!
To sum up, the fundamentals appear more negative than positive in my opinion, but from what I read it would appear that too many people are expecting a stock market collapse, and perhaps this is why it is not happening. Such moves generally only come out of the blue when everybody is long, downside risks are not being considered by the masses and the future seems bright. The expected rise in interest rates in the US this month has been telegraphed for years! I simply don’t see how a tiny but very much expected rise in interest rates, in an extremely low inflationary environment, is going to do too much to destroy confidence in the early part of next year.
To argue on the side of the bears, increasingly volatile conditions close to market peaks are not a particularly bullish signal. The 100-day moving average has been trading below the 200-day moving average for a couple of months now and the failure to break back up through May’s all-time high on the bounce from the August mini crash is another negative signal.
Unsurprisingly, the E-mini Dow Jones daily chart is quite similar, as you can see below.
I have littered this chart with trendlines in an attempt to make some sense of it and try to determine future direction, but I really have no clue as to where we will go next. You can see how this week conditions have become much more volatile, although as I write we have been stuck in a 500 point range.
I think a lot of this extreme volatility is down to a big December options expiry. According to a Bloomberg article from 9 December:
‘This important event [the Fed rate rise] falls at a peculiar time – less than 48 hours before the largest option expiry in many years,’ wrote [JP Morgan Chase analyst Marko] Kolanovic, noting that $1.1 trillion worth of Standard & Poor’s 500-stock index options – of which $670 billion are puts – will expire on Dec. 18. Roughly one-third of the puts poised to expire are at or near the money, with strike prices from 1,900 to 2,050.
‘Clients are net long these puts and will likely hold onto them through the event and until expiry,’ the strategist wrote. ‘At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.’
So be careful on Friday 18 December! After this date of course we are heading into the holiday season and markets are likely to slow down significantly.
The E-mini Nasdaq has actually seen a more positive performance as we managed to break the previous year’s high set in July at 4686 after the August mini crash and reach as far as 4739 this month.
A look at the weekly chart shows the bull trend much more clearly and indicates that the August sell-off was just a healthy correction in the bull trend. We bounced nicely off the 100-week moving average to hit that new high this month. The E-mini Nasdaq is however still quite a long way off its all-time high set in March 2000 at 4884, so this is not a particularly good comparison with the two US indices above.
European markets are a different story and a look at the DAX 30 chart below clearly shows how we have been in a bear trend for most of this year, after peaking in April. There’s a big difference here to the US markets with the DAX unable to even approach the August highs and seeing a very sharp sell-off since the beginning of December.
The FTSE 100 performance is even worse and we need to look at the weekly chart to fully appreciate the bear market conditions. The FTSE actually broke 2014 lows and even 2013 lows in the summer crash, but had already been heading south since early June. A pretty poor recovery only took us back to the July lows and again sellers have been pushing the index lower through the beginning of December. The autumn bounce could not hold above the 200-week moving average and it does appear that bears remain firmly in control of this market for the time being.
The question now is: can US stock markets break this year’s highs in a late Santa rally and potentially drag the European markets up with them? Or will US markets finally follow Europe’s lead and turn down after the New Year?
Technical Analyst & Trader
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