Speed Bumps Lay Ahead For The Market

Speed bumps.  That's what lies ahead for this market.  They may hit soon, now that stock sales to settle in 2016 take effect, or later, should they manage to drag-in some kicking and screaming money very early in the New Year. These are cross-currents. It might take an event out-of-the-blue to immediately dislodge bullish control as this is a time of year that seasonal reinvestment funds are often deployed. 

The reality: when investors have control of 'where' their money goes they are just a bit suspicious (rightfully so) of both yield-chasing and speculation at what are by any measure high price levels for the Indexes while the vast majority of S&P stocks are nearly flat or down for the year 2015. So when the S&P is 'up for the year,' it is a meaningless reference since so much is consolidated in a handful of leaders. Basically it's been a year of distribution and of insiders harvesting gains, in-part because 'they' are not confident about their own firms' profitability next year. 

2016 has the potential to be a year of retrenchment; that's what normally follows 'distribution', masked by the momentum few that gave the excessive illusion of strength to the averages. On top of all this do not forget regulators will likely be leaning on hedge funds, with a general concern of reform. Some private deals have been exited and the Stevie Cohens of the world have been exiting (or preparing to). Sure, some assert that it is a sort of political revenge portrayed by certain politicians (mostly that's posturing to populism as we've heard promises before from both parties that never result in truly serious reforms, neither in terms of the securities industry nor tax reform). 

That is more political cover for an exodus from a financially-engineered uptrend that not only is in the winding-down phase, but was distorted from earnings and facts for a long time. Whether there are legal ramifications to hedgers or others who twisted the economic reality is unknown. But we know what happened to a few of the leading characters after the financial disaster of 2008: not much. So, what has been an incredible market/economy disconnect persists. That leaves moves unpredictable on the reform and regulatory front. Regardless of all that, real investment value is hard to find. That alone is a form of warning. 

Either way, besides recalling the 'don't fight the Fed' adage this remains a market looking for rationalization to keep the upside expectations alive, when finding valid reasons is bordering on looking for needles in a haystack. And guys short that, and they get run-in. At least until a needle is found; and if stepped-on, the air comes out of the bubble, to an extent. You saw it with periodic purges in the late summer and again in the fall, as we've outlined. We're working on setting-up another. Of course 'risks' are part of the reason why the S&P is able to rally; as bears are fundamentally right, but that set them up to be rolled-over in seasonal fairly typical year-end rally efforts, which won't necessarily end on a dime.

But now it gets interesting. 

And there was no market reaction to reports of another airspace violation; in this instance over the Aegean Sea by Turkey into Greek airspace. One difference in this encounter; two of the Turkish jets 'were' armed; and they did get into some sort of dogfight with the Greek jets; though apparently there was no exchange of fire. It seems there were eight Turkish fighters plus two electronic warfare aircraft; that's a little heavy for a routine patrol or perhaps they were probing Russian naval defense perimeters; it is hard to say. But two NATO members in a dogfight? They are old regional adversaries but this is not the time for such a dispute to arise.

A hint of selling in some of the most aggressive upside issues, e.g. Amazon (AMZN) or some big-cap techs, may not occur. But if it does (after all it's just an unwashed parabolic pattern) you might view it as long booking gains in the new tax year. If that happens to others, or an index, that becomes a hint of managers looking to take chips off the table early in 2016. The bulls counter that the arguments at this point are the same as last year. Not really monetary policy; actual demand and forward estimates all are slowly and reluctantly contracting. However, even with our suspicion of markets running into resistance (whether a brick-wall or a bit softer), we suspect the first up-down reversal in 2016 is likely to be at least partially retraced (subsequent rebound) as the first couple of weeks evolve. Then you might (stay-tuned) get a secondary dip with rebound behavior into late January or early February. That might be a more risky spot if it hangs in that long overall.

In-sum: of course the foregoing presupposes no exogenous event comes along to spoil either the pattern or the bulls' expectations for more early 2016 upside.

Today's late news that an Iranian drill involving live rocket fire took place about 1500 yards from the USS Truman (in the process of launching aircraft) the USS Buckley, and an accompanying French Frigate, just hints at what can occur. 

In this case, the Navy says the rockets were not aimed at the Truman, and carrier operations in the Persian Gulf continue. This is the first revelation that Truman had departed the Eastern Mediterranean, where the Russian Navy and main body of the French Fleet are, for the Persian Gulf.

Finally congrats to the US military for nailing 10 Islamic State leaders; two were on Christmas Eve, and directly connected to the leaders of the Paris attacks. I have not heard this on US media; but it certainly should be reported as a great success against IS, perhaps even more important than the liberation of Ramadi. The news also stated that after this feat by the Iraqi army, the mop-us was almost entirely done by Iranian and Shia militia. Their involvement was likely delayed so as not to inflame Sunni locals.

On the terrorist leaders' killing, a US Colonel releasing the news pointed-out that two of them were leading computer experts for the terrorist group. Such targeting is critical given their role in incendiary propaganda (source: BBC). And yes, geopolitics will be a big 2016 market factor too.   

Daily action recognizes this as a controlled focus rally; and if oil drops (inventory build announced late today incidentally), you may have equities follow. However the primary impediment to more forward progress could be that now regular sales can be made, settling in 2016 to push gains into a new tax year.

We're flat S&P overnight; however this market, which isn't jammed overbought but getting there, might hesitate after making a higher rebound high; and again we will likely attempt fading it. That will especially be if markets respond to oil. 

There is no change to our overall assessment, which actually welcomed a rally around Christmas and New Year's, to reestablish an overbought condition; and set-up a possible challenge to extending the market move far into the new year. We will be alert for either a spike, possibly in the days ahead, and/or a rollover.