Stocks had a weak santa rally and the S&P 500 ended the yearly nearly unchanged. The S&P remains confined to the 2000-2100 range and the next major event is going to be when stocks break away from that range, up or down. Let’s have a look at the chart (click image to enlarge it):
The bad news is that a pattern of lower highs and lower lows is starting to appear, and that’s bearish. The good news is that the slower Earl2 (orange line) has finally turned up, suggesting that the recent correction is nearing an end. But the faster Earl (blue line) is just turning down, pointing to short term weakness first. The MoM indicator is rather neutral. Meanwhile we are in a lunar green period, normally favoring rising stock prices, but the LT wave for January indicates an unusually weak green period. So, this is a very mixed bag and not a straightforward setup to buy.
Whenever we have so many noses pointing in different directions it is usually the shorter term indications that pan out first. In this case that would mean stocks stay weak until the Earl bottoms out again and gets in a position to go up together with the Earl2. And it could take a few weeks to get there.
Besides stocks I would also keep an eye on bonds in the first months of 2016, and this is our chart of the week (click image to enlarge it):
As this Bloomberg article points out, the world’s main economies have to refinance $7 trillion worth of bonds in 2016. With interest rates projected to go up from their historically low levels, investor’s appetite for those bonds may not be what it used to be. And that could get interesting, especially in the countries where bond redemptions will go up compared to 2015 (US, UK and China).
As you can see in the chart, US long term bonds (TLT) have been stuck within a huge triangle from which a breakout can be expected soon. If TLT drops below 119, then a slide towards 105 becomes likely and that would be a 10% loss for bond investors. From a foreign investor’s perspective it would take a 10% climb in the US dollar to offset that loss. Of course, if the US dollar keeps climbing it would also make US stocks more attractive for foreign investors, provided they don’t enter a bear market. That’s why I am watching bonds for the potential ripple effects it will have on US$ and on stocks. If bonds decline while the dollar goes up then US stocks could become the winner because of foreign inflows.