Triggered modest shakeouts have little to do with 'front-running' seasonal or so-called 'Santa Claus' rallies, and they have even relatively little to do with gains and losses I talk about in more detail in the 'Daily Action' part below.
For instance, if Oil were rising due to genuine demand, but not due to geopolitical risk in the weeks or months ahead, there would be a real economic implication that speaks to recovery. If oil rises because one of the Iranian or Yemeni missiles as was fired over the weekend toward one of the Saudi major oil installations were to hit,lots of bets would be off, and it would have nothing to do with 'demand' by consumers or industries for fuels. And it would have to rise a lot to deflect the prospect of defaults in the sector, as loom in 2016's first half.
China is not just a major hoarder whose reversed policies collapse commodities of course; but any stimulus they plan really points to more unnecessary construction, which in the residential or office space area says they will create downward pressure on rents, and reduced equity for those citizens who invested in property (essentially diluting their ownership). Ditto for industries like steel, where the Government of China got creative, spinning off a few steel mills into private companies, which are then allowed to go bankrupt. I have said for a year that this will take time, with the United States eventually a major leader in the comeback; and I've bemoaned the lack of initiatives and tax reform that would aid the private sector mostly outside of big business interests that have engaged in buybacks structured in ways that are almost subterfuge in terms of what it conveyed to their shareholders (artificial earnings buoyancy at times even allowing heavy insider selling; like indirect executive compensation).
In sum: 2015 was a year of distribution masked by buybacks and delusions of growth and so on. 2016 can be a year of destabilization, oscillating geopolitical trends, and the further waning of a powerhouse stock market that topped with respect to Indexes in mid-2015, or in the case of many stocks, even earlier. A global commodity fall may not have much more to go; but hasn't abated as yet. The prevailing 'wisdom' is for low volatility and modest profitability in equities in the year ahead. No. More likely is a correction (or more) that forces itself upon the world via some catalyst. It might be an event like a sovereign failure by one of the major oil producers (not just Venezuela or a Gulf country, or maybe more than one). It might be related to terror; might be related to Chinese debt; might be related mildly to slippage in domestic property prices.
We certainly will not be looking for quick consumer buying resurgences, nor the foreign buyers formerly coming into our major cities. I might add the best travel bargain for Summer vacations in 2016 looks like it will be Canada.
More below, but we're not expecting anything dramatic this week, unless it's failures of the roundly expected rallies. You can get some bifurcation due to initial Jan. Effect rallies, but that's in beaten-down stocks; for which one must take care as many of those will have only limited reprieves if their earnings prospects remain soft, as is often the case.
Daily action - is always tricky for traders in any year's final week. This year for sure is no exception; although there are some variations given, the realization it seems by more strategists is that overall growth 'at best' will be on the slow side (whether they admit it or simply suggest limited gain prospects for 2016). Mostly they talk about catalysts for the market to go higher (great imaginations have been put into creative mode; sort of a replay of the year past as earnings, as well as GDP estimates, were essentially fabricated to suggest strong gains).
Here and there you hear discussions about Oil going up or down impacting the market; but it's not that simple. Oil going up a little means little; it needs to rally a lot to sidestep the defaults that otherwise are nearly inevitable next year. All those will have effects not only on psychology, or on oil companies, but on lenders as well as investment bankers that structured some deals.
While that occurs, and with the Fed 'game' being throttled down, so will merger and acquisition deals, at least initially. That prospect may change later, out of necessity, rather than clearly symbiotic combinations. It's going to be exciting for traders, perhaps more so than for investors, because most stocks are yet to see price levels that present a fairly acceptable risk/reward investment picture.
Ultimately the bullish case would be a serious correction that is slightly shy of a collapsing crash situation; but given the structure of ownership still prevailing, it may be hard to avoid the latter scenario; albeit not the year's coming initial drop that we envision. This week's transactions that would close in the 'regular way' in 2015 are over; as one can take losses (for cash) right up to the year's end on Thursday. That same three-day settlement norm also means that starting Wednesday, sales of gains (or losses if one prefers them next year) from standard settlement will be posted as 2016 transactions, in most cases (please consult your own broker or accountant; but typically that's the case).
Hence if Wednesday and Thursday fail to see upside leadership from the huge stocks of the narrow universe that bore the weight-lifting burden of the majority of 2015, you'll know that there is some 'trimming' going on hinting at the market running into a 'brick wall' (or at least a pile of restraining hay) of resistance early in 2016.
Some of this may be offset by an actual 'January Effect' in downtrodden stocks that rebound (including Energy perhaps, depending on surrounding events). In the case of Oil prices, there's too much focus on Oil being up or down relating to consumers, as the real concern is far more macro and even global when one realizes the socio-economic (and geopolitical) impact these moves have and as well will exert upon the markets and perhaps more than just markets, in 2016.
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