Editor’s note: Sign up for Serge’s special webinar: “Strategies to Survive and Thrive in a Bear Market.”
Tuesday was another wild ride in financial markets. U.S. equities fluctuated while oil continued lower and Japanese stocks plummeted.
European bank stocks took it on the chin yet again on continued worries over credit risk. The group has lost more than 25% year to date and dragged the broader European market down with it.
We live in an increasingly financially intertwined world laced together by billions of derivatives and hedge funds playing every market. What happens in one corner of the world can easily spread, particularly if it includes major banking institutions such as Deutsche Bank AG (USA) (DB).
Stateside, the Select Sector Financial Slct Str SPDR Fd (XLF) is off 14% for the year, and this following the Federal Reserve’s first rate hike in years in December.
The biggie on the news front today will be Fed Chair Janet Yellen’s testimony before the House Financial Services Committee. While I believe the Fed has more or less run out of bullets, Yellen could certainly influence the direction of the market in the near term. This was at least part of the reason we saw such choppy trading on Tuesday.
It’s ugly out there. Aside from some sharp bear market rallies, we’re likely to see much more volatility in the first half of the year.
So you know where I stand, I’ll share my base case for 2016. I expect:
- A 20% to 25% correction in the S&P 500;
- The U.S. dollar to continue its ascent;
- Deflationary forces to continue to weigh on risk assets; and
- The FANG stocks, particularly Amazon.com, Inc. (AMZN), to get defanged.
Tuning into the financial media, you’ll hear a lot of talk about a potential economic recession this year. We have seen significant declines in Q4 sales and earnings, and the majority of stocks are already trading 20% off their 2015 highs. None of this spells growth to me, so whether we end up getting a textbook definition of a recession hardly matters.
One interesting dynamic of late has been the relative outperformance of some of last year’s laggards, such as energy (purple line) and materials (green), versus the financial sector (red) and the S&P 500 (blue). The relative strength in energy and materials may present active investors with some opportunities on the long side as short sellers get squeezed.
Finally, looking at the chart of the S&P 500, the path of least resistance is lower. I think the 1,600 area will be reached before the bear retreats; however, in the near term, the index remains very oversold. And even from a seasonal perspective, a bounce into the second quarter looks likely.
Any such bounce should find resistance in the 1,990 to 2,000 area. Active traders could buy the next bullish reversal confirmation. More conservative investors should look to unload some stocks on the bounce.
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.
As of this writing, Serge did not hold a position in any of the aforementioned securities.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! You can also sign up for his special webinar: “Strategies to Survive and Thrive in a Bear Market.”
