New Year Likely to Bring Even More Volatility

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All good things come in threes, so the saying goes. In that vein the Santa Claus rally continued with Wednesday marking the third consecutive day of gains. It was a quiet but steady lift higher, and one very typical for this time of year.

The major indices each gained roughly 1%, boosted by a strong follow-through buying day in oil. The energy sector led the pack with Energy Select Sector SPDR (ETF) (XLE) up 4.3%, which was nearly twice as much as the next strongest sector — materials.

This brings me to an important point that I often see novice and professional investors either underestimate or ignore: When a sector, industry or an entire market, for that matter, gets sold off due to one overriding theme, the countertrend bounces or trend changes see extremely high correlation. Case in point, with oil prices rallying more than 4% on Wednesday, anything even remotely related to energy or materials rallied in kind.

Over the past few months, I have witnessed many traders try to pinpoint that one energy stock they simply must own for an oversold bounce. The reality is that while some stocks may bounce more than others, when correlation is high it may be best to go with an ETF from a risk management perspective.

Below is a multi-week, 120-minute chart of the United States Oil Fund LP (ETF) (USO) in red versus XLE in blue. While correlation has been high for months, it will likely be even higher when oil prices bounce. I think this will be an important fact to keep in mind next year.

XLE vs USO Chart
Click to Enlarge

On the chart of the S&P 500, note that with the three-day rally the index has worked its way back up to the 2,060 area and a simple diagonal resistance line from early December.

S&P 500 Chart
Click to Enlarge

This area coincides with the simple 50-day and 200-day moving averages. Should this line hold as resistance, we may be in for more trouble soon. But if the index can push through and establish itself above it, then my cyclical bull market high of 2,170 to 2,200 is likely attainable before things get worse.

As this is the last Daily Market Outlook before Christmas, allow me to take a minute to pause and reflect back on 2015 and look ahead to 2016.

In many ways, 2015 was the year of the return of volatility. While stocks largely traded sideways, the August/September shakeout is likely a sign of things to come in 2016.

If we expand our horizon across asset classes and the globe, there was significantly higher volatility and more downtrending price action. Thus, my theme for 2016 for stocks is the year of volatility.

As it relates to the economic picture, 2015 marked the seventh year in a cyclical bull market (likely within a new secular bull market), making it long in the tooth historically speaking.

I think 2016 is likely to bring a 20% to 30% correction in the broader market at some point, but make up a good deal of those losses by year end.

As always, it was a pleasure and honor to cover for the venerable Sam Collins this week. Merry Christmas and happy holidays to all!

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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As of this writing, Serge did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/daily-market-outlook-new-year-is-likely-to-bring-even-more-volatility/.

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