S&P 500 (SPY @ 190.27 9:59 a.m.) has good support here; a rally is possible
Several bullish factors converge:
- the spike low at 180.38 seems to have held (although near-term tests to that range would not be surprising;
- support and a reversal has been found at 185 3 times now (if the recent lows hold) after 2 spikes down to the 180-181 area;
- the most recent lows are exactly at twice the projected most recent trading range:
210 - 197.5 = 12.5 point trading range violated around New Year's;
197.5 - 12.5 = 185.
Generally, when multiple factors converge, you can expect at least a respite from selling if not an outright rally.
Whether this will be a significant rally or simply a regaining of half or a third of the ground lost since the December 210 highs is anyone's guess. Also, markets tend to form W's more often than V's, so a re-test of the recent lows would not be out of order. But selling the market heavily short at this point or remaining too heavily in cash would likely be a mistake.
Other nontechnical bullish factors:
Seasonality: January tends to be one of the strongest months, rising 1.02% on average since 1950, 0.88% since 1980. The average of other 11 months is only .668% since 1950, .77% since 1980. As of this writing, the S&P 500 is down almost 7%. Only 5 times since 1950 has January closed down 6% or more from last year's close: 1960, 1970, 1978, 2008, 2009. Had you bought at the close on those down January's, you would have seen a profit for the next 11 months in every year except for 2008. (So contrary to popular lore, January's that are down, especially down hard, do not necessarily predict bear markets for the next 11 months.)
Gloom and Doom: Although difficult to quantify, the prevailing mood about the market and the world economy seems very negative. They say that the market climbs a wall of worry, and we have a nice one built from fears over stagnation in Europe, a refugee crisis that is the worse since World War II (and that will unlikely directly harm Europe's attempt to recover from the Great Recession but will indirectly do so if the open borders of the European experiment are closed, shutting down trade or making it much more cumbersome or expensive), to increased security costs from terrorism, to China's slowdown. Throw in North Korea's usual nuttiness, continuation of the Saudi-Iranian struggle for supremacy, and the meltdown in commodity prices and oil, and you have enough to keep you worried (if you are so inclined) until 2017. Although my prediction: the thing that we will be most worried about between now and year-end is something that is not even on our radar screen. I am not saying I have a clue what it is, but our capacity to worry about the wrong things and be surprised is extraordinary.
Some ways to quantify this gloominess: how much are investors willing to pay for a dollar of earnings or dividends? $21 for the former, $44 for the latter. Historically in the higher end, but not in the nosebleed territory we have seen before past market meltdowns, and certainly low relative to interest rates. To put these in perspective, investors are getting about a 4.7% earnings yield, a 2.27% dividend yield, and only a hair above 2% on the 10 year Treasury note. So stocks' earnings yield is 2.35 the Treasury yield; past melt-downs have often seen a ratio of less than 1, as in 1987, 1998, 2000. The 2008-2009 crisis was not preceded by such parity, but came much closer than it is today.
This ratio is a crude measure of how much more riskier people view stocks than safe Treasuries. They are demanding 235% the return on stocks (as measured by earnings which eventually will be reflected in dividends and/or stock appreciation) as on riskless Treasuries. This is hardly bubble territory.
Presidential Election Year Cycle: Although it has broken down some lately - 2008 was a horrible election year (-38.5% drop in the S&P 500) in which all historical factors were swamped by a financial implosion - the 4th year of the quadrennial presidential election year cycle - election year - is unusually bullish. In fact, 2008 was one of only 3 down years (18%) of the 17 election years since World War II (1960, -3.0%; 2000, -10.1%; and 2008, -38.5%). The horrible 2008 performance dragged down the average presidential year performance to 6.24% since World War II (9.99% if dividends are included), but 2012 returned a respectable 13.4% (16.0% with dividends).
If 2008 represented a bizarre, 3 standard deviation event that will unlikely be repeated in our lifetime, then we could simply ignore it and crunch the numbers again, but this is too tempting. Two better ways to deal with extreme outliers is to throw out the lowest AND the highest and recalculate. This brings the election year average to a more respectable 7.9% average (11.6% including dividends).
The second way is to use the median (middle value) versus the mean (average). In financial series, this is somewhat deceptive, since your average return is the mean, not the median, and average return is what we care about. (Technically, it is the geometric mean, but the principle remains the same.) The median election year saw the S&P 500 rise 9.0% (11.1% total return), worse than the 16.9% median pre-election year (21.8% total return), but better than the 7.1% (10.1% total return) of the other two years.
This compares still favorably with a 5.9% average S&P 500 gain during the first two years of the presidential cycle (post-election and midterm), but lags the best of the 4 years, the pre-election year, when the S&P 500 rose 15.2% on average since World War II (19.1% with dividends). Here is something else very interesting about the pre-election year: only 2 (1947, 2015) have fallen but both only 0.7% (one was flat)! After dividends, there has never been a losing pre-election year on the S&P 500 (the two worst total return years were the last 2 - 2011 (2.1%) and 2015 (1.4%))!
Bottom line: expect a mild tailwind from the presidential election year cycle.
Several bullish factors converge:
- the spike low at 180.38 seems to have held (although near-term tests to that range would not be surprising;
- support and a reversal has been found at 185 3 times now (if the recent lows hold) after 2 spikes down to the 180-181 area;
- the most recent lows are exactly at twice the projected most recent trading range:
210 - 197.5 = 12.5 point trading range violated around New Year's;
197.5 - 12.5 = 185.
Generally, when multiple factors converge, you can expect at least a respite from selling if not an outright rally.
Whether this will be a significant rally or simply a regaining of half or a third of the ground lost since the December 210 highs is anyone's guess. Also, markets tend to form W's more often than V's, so a re-test of the recent lows would not be out of order. But selling the market heavily short at this point or remaining too heavily in cash would likely be a mistake.
Other nontechnical bullish factors:
Seasonality: January tends to be one of the strongest months, rising 1.02% on average since 1950, 0.88% since 1980. The average of other 11 months is only .668% since 1950, .77% since 1980. As of this writing, the S&P 500 is down almost 7%. Only 5 times since 1950 has January closed down 6% or more from last year's close: 1960, 1970, 1978, 2008, 2009. Had you bought at the close on those down January's, you would have seen a profit for the next 11 months in every year except for 2008. (So contrary to popular lore, January's that are down, especially down hard, do not necessarily predict bear markets for the next 11 months.)
Gloom and Doom: Although difficult to quantify, the prevailing mood about the market and the world economy seems very negative. They say that the market climbs a wall of worry, and we have a nice one built from fears over stagnation in Europe, a refugee crisis that is the worse since World War II (and that will unlikely directly harm Europe's attempt to recover from the Great Recession but will indirectly do so if the open borders of the European experiment are closed, shutting down trade or making it much more cumbersome or expensive), to increased security costs from terrorism, to China's slowdown. Throw in North Korea's usual nuttiness, continuation of the Saudi-Iranian struggle for supremacy, and the meltdown in commodity prices and oil, and you have enough to keep you worried (if you are so inclined) until 2017. Although my prediction: the thing that we will be most worried about between now and year-end is something that is not even on our radar screen. I am not saying I have a clue what it is, but our capacity to worry about the wrong things and be surprised is extraordinary.
Some ways to quantify this gloominess: how much are investors willing to pay for a dollar of earnings or dividends? $21 for the former, $44 for the latter. Historically in the higher end, but not in the nosebleed territory we have seen before past market meltdowns, and certainly low relative to interest rates. To put these in perspective, investors are getting about a 4.7% earnings yield, a 2.27% dividend yield, and only a hair above 2% on the 10 year Treasury note. So stocks' earnings yield is 2.35 the Treasury yield; past melt-downs have often seen a ratio of less than 1, as in 1987, 1998, 2000. The 2008-2009 crisis was not preceded by such parity, but came much closer than it is today.
This ratio is a crude measure of how much more riskier people view stocks than safe Treasuries. They are demanding 235% the return on stocks (as measured by earnings which eventually will be reflected in dividends and/or stock appreciation) as on riskless Treasuries. This is hardly bubble territory.
Presidential Election Year Cycle: Although it has broken down some lately - 2008 was a horrible election year (-38.5% drop in the S&P 500) in which all historical factors were swamped by a financial implosion - the 4th year of the quadrennial presidential election year cycle - election year - is unusually bullish. In fact, 2008 was one of only 3 down years (18%) of the 17 election years since World War II (1960, -3.0%; 2000, -10.1%; and 2008, -38.5%). The horrible 2008 performance dragged down the average presidential year performance to 6.24% since World War II (9.99% if dividends are included), but 2012 returned a respectable 13.4% (16.0% with dividends).
If 2008 represented a bizarre, 3 standard deviation event that will unlikely be repeated in our lifetime, then we could simply ignore it and crunch the numbers again, but this is too tempting. Two better ways to deal with extreme outliers is to throw out the lowest AND the highest and recalculate. This brings the election year average to a more respectable 7.9% average (11.6% including dividends).
The second way is to use the median (middle value) versus the mean (average). In financial series, this is somewhat deceptive, since your average return is the mean, not the median, and average return is what we care about. (Technically, it is the geometric mean, but the principle remains the same.) The median election year saw the S&P 500 rise 9.0% (11.1% total return), worse than the 16.9% median pre-election year (21.8% total return), but better than the 7.1% (10.1% total return) of the other two years.
This compares still favorably with a 5.9% average S&P 500 gain during the first two years of the presidential cycle (post-election and midterm), but lags the best of the 4 years, the pre-election year, when the S&P 500 rose 15.2% on average since World War II (19.1% with dividends). Here is something else very interesting about the pre-election year: only 2 (1947, 2015) have fallen but both only 0.7% (one was flat)! After dividends, there has never been a losing pre-election year on the S&P 500 (the two worst total return years were the last 2 - 2011 (2.1%) and 2015 (1.4%))!
Bottom line: expect a mild tailwind from the presidential election year cycle.
