December 2015 In Review, January 2016 Preview

Yup … just like that and another year is gone. And what a year it was too. Fengshui and Numerology Masters warned us of a very disruptive year in 2015 that would be fraught with trouble, unrest, instability and renewal (change). We got lots of that all over the world and in the markets. A lot of us also got all that in our lives. The good news is that its all behind us now. The bad news is next year, 2016, might get worse for a lot of us.

When the year started, Singapore was not showing any hints of weakness but as the year wore on, it became very apparent that the Little Red Dot had a growing problem. Elections did little to bring any change. Instead, things worsened. Now we end the year as one of the world’s worst performing economies in terms of our macro stats. Read it all here: 13 Charts Saying Singapore Is Not Well

The United States did not fare better either. December 2014 threatened to send the market from the third to the second biggest bubble in history. However, the market corrected in January and stayed sideways for most of the year. August brought on major volatility that helped valuations deflate a little. But as soon as that was over, the market rallied and ended 2015 as the second biggest bubble is history, losing out only to the 1929 bubble. Read all that here: The Fed Fund Rate, The Market & 2016. Janet Yellen finally lifted rates off the floor in December but it had little effect on the market as the year-end always trades on the year’s lowest volumes. Shrewd move if you asked me.

So now we face 2016 and the possibility of more volatility. Analysts and economists are already expecting some sort of correction in the US while the rest of the world battles with excessively liquidity that has done nothing to lift their respective economies. The Self-Fulfilling Prophecies from 2015 are already pointing to downside in 2016 with May not selling off, Black Friday’s numbers performing poorly and Santa Claus looking like bypassing Wall Street again – it’s all a deja-vu of 2014.

On the personal front, it was a great year. It was definitely better than 2014. You can see my report card on the improvements in my Facebook Posting. I will be posting my goals for 2016 over the weekend and I am wondering if it might be a tad over-ambitious.

The second week of December 2015 was a small historical event for me as the Pattern Trader Tutorial completed its tenth year.

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No other program has lasted this long with one teacher teaching it, selling it and supporting it. While most gurus come and go within four years, I am proud to have outlasted many of them by doing what I do with a passion. And I still love what I do at the Tutorial dearly.

For 2016, the Tutorial is going to go through another evolution that’ll make it even stronger than it is now. With the plans already in motion, I am really excited about its outcome and can’t wait to complete this project. And it is the graduates that will be the biggest beneficiaries of this evolution. Due date: Start of Q3, 2016.

MARKET MATTERS

In spite of the major U.S. indices closing in mixed fashion – DOW (-2.23%), NASDAQ (+5,73%) and SPX (-0.73%) – the one clear sign is from the Transports (DJT -17.84%) which is ominously pointing to more downside – and the DJT has historically been more reliable as a market indicator than the pretty boys of the DOW, S&P and NASDAQ.

(Click graphics to expand to full size)

Indices

DOW, NASDAQ, SPX, DJT (1Yr, Daily) 50DSMA (Blue) 200DSMA (Red)

Another thing to note is on the monthly configuration of the DOW and DJT when used against the standard MACD (12, 26, 9) – notice how the histograms have been a reliable indicator of doom and gloom?

DOW MACD 20yrs

Dow Jones Industrial Average – 20yrs (monthly) MACD (12,26,9)

You would have noticed that the MACD’s drop into red coincides with the end of an up trending Elliot Wave. Notice also how it was a reliable long-term indicator of doom – as the DOW made new highs (2 to 3), the MACD histograms made lower highs. It repeated the trend between waves 4 to 5(?) again, implying that we could be in for more volatility going forward.

DJT MACD 20yrs

Dow Jones Transportation Average – 20yrs (monthly) MACD (12,26,9)

Here’s how the rest of the world fared …

China closed in the black by +9.41% at 3,539.60 but ended the year in bear market territory by falling -31.49% from their June high of 5,166.35 …

SSEC 9.41

Hong Kong also closed in bear market territory falling -22.95% from its April high of 28,442.75 to close out the year at 21,914.40 for a YTD loss of -7.16%

HSI -7.16

Australia also closed out the year in the red by -2.13%

ASX200 -2.13

Japan bucked the global negative/bear trend by closing the year with a +9.07% gain …

NKK 9.07

Malaysia closed the year out in negative by -3.86%

KLCI -3.86

And Singapore fared the worst amongst South-East Asian countries by closing -14.34% in the red for the whole year. For the record, the STI was in bear market territory (more than 20% down from the high) in September.

STI -14.34

Over in Europe, the markets there had a positive year in spite of its difficulties and the Grexit that never happened.  However, in the U.K. the FTSE closed out 2015 -4.93%

FTSE -4.93

The DAX made a YTD gain of +9.56%

DAX 9.56

And the CAC40 also closed out the year with a +8.53% gain.

CAC 8.53

As you may have noticed, all these benchmark indices (with the exception of NASDAQ) closed the year below their 200DSMAs.

As of the close of the year, Finland, Taiwan, Greece, Russia, Brazil and Venezuela are in recession and Singapore registered its 13th consecutive month in Deflation at -0.8%. The previous time Singapore was deflated for longer was 14 months between 1986 and 1987.

SG Deflation 2015

January Preview

January 2016 has 19 trading sessions and two holidays. January is usually a bullish month and is famous for its January Barometer prophecy – “As goes January, so goes the year”. This implies that if January closes with a gain, so should the rest of the year. But if January closes with a loss, we’re in for a tough year.

Also watch for the “First Five Days” indicator that is as reliable as the January Barometer – if the first five sessions of the year finishes with a gain, the year is often bullish. If they lose, the year will likely be bearish.

January is the last month in the “Best Three Consecutive Months” in a trading year – November, December and January – that has seen the DOW make gains 15 of the last 21 years. However, the last three years going back to 2013 has seen January go down.

January Trivia

Economic Dates

Commodities

SUMMARY

Earlier in December, I wrote;

2016 Outlook

Assuming Janet Yellen raises the Fed Fund Rate in December (or any other month thereafter), I would expect a knee-jerk reaction to follow in the equity space. Stocks should sell down anyway given the bubble they’re in so this may not be a bad thing and is something Yellen would have anticipated. The sell down could get very nasty. It would not be too far fetched to call a 35% correction. This would bring the DOW down to 11,200 from where it currently is and the S&P should see downside to 1,320.

Yes, I know what you’re saying and you can bet that I am used to it by now. But the irony is that I always make a call that everyone thinks is crazy and when the market eventually makes that dive, I’m not the one going crazy with fear.

Preceding that drop, watch for for bond yields to fall and the curve should flatten. I am going to stick my neck out and call for an inversion on the curve within Q1 of 2016.

My worst case scenario is a 45% correction if we get an inversion on the curve. However, given the Fed’s easy trigger on the printing press, I reckon they’ll curb the fear before it gets there.

By the end of Q3, we should see the worst the market can offer. If Yellen sticks to her December plan, the rate would be up to 1.25% by the end of Q2 given that she’ll have five Fed meetings to get it up there with a 25bps hike at each meeting. The fear will come to a head by Q3 where I suspect the market will bottom into Q4.

2016 is an Olympic year for which there has never been a loss since the end of WWII. It is also Election Year which means that the market could recover some of those losses in Q4 when the Elections hit fever pitch. This could drive the market up quickly and close out the year without a loss to keep the Olympic record going. For this to happen, watch for a flight to quality at the start of November. Bond yields should start rising rapidly by then.

However, that might not be the end of that nightmare. A lot will depend on how commodities react to all this. Personally, I am not optimistic. If commodities stay cheap, we could see more pain return as we trudge into 2017. If commodity prices suddenly spike to record highs, we’re looking at inflationary prices amidst poor growth/deflation. That too is not far fetched considering we’re expecting one of the worst El Nino conditions to hit this planet in 2016. That could well hit crops and create massive shortages in Q3.

The Fed Fund Rate hikes should return the equity space into a rally by Q4 (elections) and into 2017 if by some miracle, El Nino is merciful and commodity prices return into a decent uptrend based on demand and not shortages. Crude should stay rooted between 40.00 and 60.00 till 2017. Agriculture based issues should drive the recovery as will the return of metal based issues. Watch the miners for leads.

The main cause for concern on the street (everywhere in the world) is that liquidity will dry up. As it is now, liquidity is always drying up as we see businesses scaling down and job cuts become more and more common. Sales-based businesses are already targeting the middle to lower income earners as liquidity at the top income earners have long dried up (having parked their monies in long term fixed income safety).

The worst that will happen is that individuals and families who are over-leveraged on debt and businesses that have become too addicted to easy and cheap money will get hurt the most. It is already happening and it will worsen as the rot spreads upwards.

It feels like 2007 – 2008 all over again as far as the market sentiment is concerned. I have mentioned several times since 2014 that economies are likely to take a three year slide starting in 2015. How the markets react to this economic weakness is something else. Looking back at 2015, it sure looks like we’ve completed the first of those three years.

If things pan out as I anticipate, we might just be looking at a repeat of 2000 to 2003 when the market didn’t crash in a hurry but took us on a three-year slow bleed. Those kinds of recessions are the worse – slow killers with no horizon to look forward to.

Most of the younger generation will not know of, or remember, the painful markets of 1974 to 1985 and 2000 to 2003. The current young workforce aged between 20 and 32 can not know what it is like to be in a severe recession and to be retrenched and unemployed for long stretches in time. We’ve had things so good for so long that complacency and nonchalance will be the main cause and catalyst for the next great downfall – history has proven it so many times in the last 130 years – and this time, I reckon we’re in for the big one.

“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.”

jesse_livermore_400x400

~ Jesse Livermore, 1877 – 1940

Happy New Year to all my followers, readers and graduates. All the best for 2016 and Happy Hunting always!

Conrad.

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