On this last day of 2015, it’s time to pause, reflect back on the year that was and make some New Year’s resolutions for 2016. Not just for life — but for trading and investing, too.
How did your portfolio do in 2015? Did you stick to your rules, even at the worst of times? How did you handle the flatlining of the market in springtime, or the volatility in August and September?
Remember: The best traders and active investors have a simple but repeatable process that they can trust and rely on in all market environments.
For yours truly, the No. 1 financial lesson I was reminded of in 2015 is that mean reversion is a real, and real frequent, phenomenon.
S&P 500 (SPY) Charts
Look at the below chart of the S&P 500, as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
2015 was a year of churning for the S&P 500, much to the frustration of both the ardent bulls and bears. The blue horizontal around the $206 mark, which also represents the unchanged mark for the SPY, acted as both support and resistance all year.
A managing director boss of mine at JPMorgan (JPM) used to remind me each morning to “buy the dip but sell the rip.” This old but true axiom worked for traders and active investors this past year as it usually does.
The trick is the timing.
As I look at the global macro picture as well as U.S. equities into 2016, more clouds are gathering on the horizon. After a seven-year cyclical bull marke,t things are looking stretched, just as the typically late-cyclical jobs data peaked earlier this year. While we do have an election year in 2016 and I don’t necessarily foresee a big market crash on a year-over-year basis, volatility is likely to increase in many asset classes.
Note that small-cap stocks are lower by 4.6% year-to-date, which is lagging the flatlining SPY and as a signal is more in line with the crashing high-yield market.
Further concerning signs come from the massively deteriorating market breadth.
On the next chart I plotted the S&P 500 in blue versus the ratio of the equal weight S&P 500 to the regular, market-cap-weighted S&P 500. Note the massive divergence, which shows that the S&P 500 throughout much of 2015 was held up by just a few heavily weighted stocks. While this ratio can certainly improve in the near-term and even see a notable rally into the first quarter of 2016, through a six- to 12-month lens, the chart points toward more volatility for equities.
The aforementioned high-yield market, as represented by the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG), has diverged from stocks all year as well. Part of this was because of problems in the energy sector, but through a bigger-picture lens, the read-through regarding deleveraging and slowing growth is quite clear.
As I type up these words and wind down 2015. I am thankful for a wonderful and loving family and an always engaging, smart and fun audience. In 2016, opportunities will once again be up for grabs at every turn in life as well as in the financial markets. May we do our very best to pounce on those opportunities without hesitation.
Happy New Year to you and yours!
– Serge
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