General Stock Ideas

[scstocks]

Will the stock market’s house of cards collapse in 2016?

Published: Jan 4, 2016 2:08 p.m. ET

http://www.marketwatch.com/story/will-the-stock-markets-house-of-cards-collapse-in-2016-2016-01-04?dist=tbeforebell

It's the time of the year where Wall Street's seers dust off their crystal balls and peer into their tea leaves to augur what's on tap for 2016.

At 82 months, this bull market is much older than the average bull. It doesn't take a psychic to guess investors' most pressing question: How much longer can the QE and ZIRP house of cards stand? Will 2016 be the year stocks collapse?

What the seers see


In December, Barron's polled a group of 10 prominent Wall Street strategists. Based on their mean forecast, the S&P 500 will end 2016 at 2,220.

A year ago, the same pros predicted the S&P would end 2015 at 2,260. Predicting year-end price targets is a tough gig, and you can't blame (or should we?) Wall Street analysts' for being too positive. After all, peddling stocks is their bread and butter.

One reason even Wall Street's elite forecasters can't get it right is that their forecasts are based on yet another variable: Corporate earnings.

Trying to predict stocks based on earnings is like predicting the weather based on who wins the Superbowl. Adding one more variable doesn't make it any easier. How about we look at some actual facts, not additional variables?

What the indicators say: Liquidity

Investing is about putting the odds in your favor. What are the odds of a 2016 bear market?

Since we're talking about odds of a market top, it would be appropriate to look at the same indicator that correctly foreshadowed the 1987, 2000 and 2007 market top. This indicator's historic track record is available here.

The May 31, 2015, Profit Radar Report warned that — for the first time since March 2009 — buyers are becoming more selective (liquidity is drying up), which is what happened prior to the 1987, 2000 and 2007 tops.

This condition created a bearish divergence between the S&P 500 (which rallied to a new all-time high on May 21, 2015) and our trusty liquidity indicator (which did not confirm the May S&P high).


An updated look at this stock market liquidity indicator is available here.

What the indicators say: Investor sentiment

Investors are (and have been) somewhat bearish about stocks. Actually, it might be better to label investors as suspicious rather than bearish.

From the get go, investors didn't like QE and what it stands for (bailing out Wall Street). Ironically, this suspicion has fueled the post-2009 bull market longer than many expected. Bull markets climb a wall of worry ... and flame out in euphoria.

There's been no euphoria yet. The chart below plots six different investor sentiment gauges against the S&P 500. There was no euphoria at the May 2015 all-time high, and there's surely no euphoria today.


Whether this will be enough to extend the bull market remains to be seen. Ironically though, the lack of bullishness is the best thing bulls have currently going for them.

Based on liquidy (or lack thereof), the odds for a 2016 selloff are elevated. That said, investor sentiment may keep the down side limited or cause more choppiness (tug of war between liquidity and sentiment forces).

On a shorter-term note, the results of the so-called Santa Claus Rally (last five days of old year and first two days of the new year) will be in soon. Can you trust this old aphorism? "If Santa Claus should fail to call, bears will come to Broad and Wall." This report shows why you can't.