A Striking Series Of Shifts To Hit 2016 Markets

A striking series of shifts are slated to occur in 2016, setting the stage for a pattern evolution that is anything but sanguine as we saw during the forecast distribution year of 2015 and which has the potential for more than Monday's plug-pulling, as street bulls remain dangerously and heavily leveraged.

As I've mentioned, the United States is relatively insulated compared to foreign countries in terms of trade; the Dollar remains as strong as I've projected it for three years now. 

This combination weighs on companies that are heavily dependent on overseas sales; especially where they have effective competition (heavy equipment, but not for instance in cellphones) It does, however, benefit domestic or primarily local-sales firms that are not heavily impacted by currency swings or a dependency on exports.

The markets are relieved that the past year is behind (great for traders, awful for investors and a disaster for many hedge funds); but may be overly complacent about the future behavior of Indexes. The lightning striking the market has singed the edges, but not really zapped the market down to a realistic level relative to where the economy is and the growth levels ahead. Even if better at the outside, the market is still heavily leveraged and screaming for adjustment.

During this time we should reflect on actuarial issues just for a moment. As noted for some time, it's almost impossible to achieve actuarial goals that beneficiaries demand.  It's ludicrous that so many years since the reset of return rates, many pension or similar plans continue to over-promise and under-deliver; rather than reform.

Companies with large pension deficits will continue underperforming because of this failure to broadly reset total return goals. As present value of their future liabilities continues to rise; it's their version of can-kicking; a topic rarely discussed, but one that managers are keenly aware of. Alongside a mixed asset return reality, pension funding ratios have continued to deteriorate. Similarly, insurance companies struggle with steadily falling reinvestment yields and solvency ratios. And that has little to do with annuity guarantees.

After all, an investor (typically older) is being paid out of his or her own money for years while being sold (not all in annuities but mostly) on the idea of safe income and even appreciation (using threshold levels; which really help only if invested just after a market crash). I'm talking normal pension funds.

Recently, Sovereigns have commenced issuing debt at record low or altogether negative yields. In April, Switzerland became the first country to issue 10-year government bonds at negative yield; other governments did the same at shorter maturities. This is mostly confined to Europe but if you look at rates 'not' being paid on deposits in U.S. banks, one can argue an indirect drain here too, by simply not paying proper market rates while banks recycle your funds solely for their own gain.  

This is yet another another aspect of why Indexes are high as yield is chased; leaving all sorts of funds, sovereigns, and others leveraged at risky levels. None of that provides timing for the next plunge as may be occasioned by an exogenous event (Monday was only partially that), or any financial occurrence that triggers algorithmic selling. It's why  we keep trading the S&P rather than being doctrinaire about the market having to do anything particularly.

We do believe there is a raid  coming of a grander degree than we saw Monday; we do believe the stocks already on the hard down slope (a larger number than pundits will readily acknowledge) are seeing the easiest gained (or lost) decline behind, but now the atmosphere of a purge can stall a bottoming formation for many.


In sum, running into a 'brick-wall of resistance' began in earnest in the last two trading days of December, as shares would settle in the new 2016 trading year. We may get more January Effect or not after the wild ride Monday we can also envision a more visible retreat thereafter, plus a couple rebounds. Should that carry into early February, because of desperate efforts by over-leveraged managers very much concerned about the market falling into the underlying technical vacuum, you might see more significant risk postponed until then. But it's very shaky; as Monday's S&P did all it could to not close below the November/December lows.

Under circumstances that relate to an ability to forestall (essentially inevitable, which is why shorts know this but get run-in), we contemplate an interlude of fading spikes or purges (shorting or going long); against a viewpoint that this is an uncorrected overall market, following a 'distribution year', heading towards a serious sell-off beyond Monday's at least until we get into the underlying vacuum I've often discussed technically. All will be increasingly visible. Thus, if we see more defaults, roiling of credit markets or exogenous events, be nimble or careful. Any of these can break chart patterns, already penetrating the long-lasting primary S&P uptrend.

Against this background is complacency by institutional majorities calling for nominal upside without serious concern. By itself a striking reflection of a Wall Street inability to come to grips with circumstances they got into with over-reliance and pressure on the Fed to maintain excess stimulative policies. They are now fighting the Fed, as the Fed itself is frightened by finding itself in the corner they painted themselves into.

Relativity remains the reason I am bullish on America in the future. That as you know is why my Dollar bullishness for 3 years (now crowded trade); while our projections (inherent with that Dollar FX call) for competitive devaluations, both contributed to 'relative' instability and scrambling by other countries. Yes, in Europe and even Japanese exports you see some recovery, while China has a few major problems, including Debt. 

While we envisioned America leading the world out of this morass, it's mostly been  thwarted by geopolitical events; overreaching on the part of some politicians (intentional or unintentional destabilizing of countries is a part; failing to recognize and adopt to the changing world is another; mixing compassion with security concerns from essentially 'reverse colonization' in the EU is yet another); and above all China's reversal of their commodity hoarding schemes, and the Saudi-led Oil war against Russia and indirectly,the US. (See below for more Middle East remarks and map showing distribution of Sunni / Shiite populations in the 'war theater'.) 

Much of this is counter-intuitive, and promises a year of confused alliances; of expectations that often remain unsatisfied (social status needs to cope better to mitigate resentment against the system); and acceptance that a manufacturing renaissance I've called for will gradually occur.

As for oil, the last time oil prices stayed this low Russia virtually collapsed and US deflation was followed by inflation taking off. This is a bit different now due to discoveries (shale, plus fracking etc.; various forms of secondary and tertiary recovery) not just in traditionally-prolific oil areas. 

This year look for oil to bottom; but the political schisms in the Middle East exacerbate tensions and the big question mark relates to the deep core of the Shia/Sunni strife. That's perhaps less ISIS and more Saudi/Iran.   




To the US State Department this is an impossible mess unfolding. It dates from our President's failure not only with respect to Syria (the chemical weapons) or Egypt's Mubarak, or the botched stabilization of Libya; all of which promoted a disdain by the Saudi's, and projected weakness or indecision to the Iranians. It is not the point to affix blame for destabilization (although policies errors are so clear to just about everyone outside of Washington); but to recognize that there is little upside to backing Saudi Arabia, and even less to backing Iran. Both are anything but democracies, and some would even favor these theocracies being left to fend for themselves. 

The problem with that relates directly to Oil. Iran probably wouldn't dare, but in the past has threatened to close in the Straits of Hormuz. If that were to happen, USS Harry Truman's Battle Group would be required to open it for international shipping (millions of barrels of oil traverse it daily); so doing so would quickly involve us. More likely is a problem with Bahrain; which also saw a 'sacking' of the Saudi Embassy there; because Bahrain; twice before having a Saudi military response (requested by the minority Sunni rulers) to quell riots by Shiites (the majority), would be a potential flash-point. That's true too for the oil-processing-loading facilities in Saudi Arabia; that's their Shia minority region as well. And that's, as noted before, why they worry about Yemen's proximity.

One final thought I'd also mentioned before: nobody considers that the Russian efforts in the Middle East, while controversial, wouldn't necessarily be troubled by an Iranian/Saudi conflict, which caused Oil prices to soar; helping Russia out of what is a very challenging situation.

Having forewarned about China, Oil, Housing, ISM, reverse colonization; FX or similar disintermediations and competitive devaluations; and simply fairly slow growth; there is no surprise in any of this.

Our forecast was for the market running into a brick wall of resistance as soon as stock transactions could settle in 2016. If this was a brick wall, it wasn't just hit; but crumbled. The Street desperately is trying to find enough mortar (money or liquidity) to shore up what remains of the wall so that it doesn't collapse beyond repair (that would be a close below the November / December lows). That's what they tried to do during the last hour on Monday; and probably more such efforts will follow. That's also why we have partial-profit protective needs looming (aside the intraday scalping moves during this day or any day) initially at 2015+ (fairly close by but if seen in the early going Tuesday expect S&P to partially retrace prior to rallying again); just for roughly 25% of positions; with more to follow as will be assessed (part of it may be retained, eventually as a 'position' posture from 2065 for weeks, if the rallies are shy of significant advances and just daily-basis battles).

For just now, we continue holding short March E-mini / S&P from 2065.

This remains a very leveraged market; 'regression to the mean' (referring to our long-desired catch-down of market prices to where growth rates might really be when properly viewed) is just starting; and will be fought. Dangers persist after the most bearish start to a January since the 'Epic Debacle', and if we'd stayed down at the day's low, the biggest January downside start in 84 years. Oh yes; that was 1932; the bottom of the Depression. NO, we didn't bottom beyond the upcoming rebounds; but yes, if' we drop enough later in the year; it's not out of the question that 2016 becomes a significant low (far lower levels) for history. 

It goes without saying our call for 2015 to be a distribution year with Index highs that won't be exceeded for quite awhile, has been proven. Actually, we've indicated that a recession will be shown to have started around July, just about the time the Fed tapering began, and in-line with our projections for erratic declines and erosion. 


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Ashley Koncul 8 years ago Member's comment

Very thorough, thanks.