6 Sentiment Indicators Signaling High Anxiety for 2016

Expectations heading into 2016 are lower now than they were a year ago, according to these six sentiment indicators

Senior Vice President of Research
Dec 28, 2015 at 9:18 AM
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"Round-number areas have been extremely important … [B]uy SPX 2,000; sell 2,100 (or 2,120) … 79% of the closes have occurred in this range, or 193 out of 244 days … [T]he short-term technical outlook favors the bulls from the perspective that bulls and bears will wager a fierce battle into year-end, just as they've done in all of 2015 … For now, it would appear that the old '80/20' rule puts the risk/reward in the bulls' favor, with the SPX closing at 2,005.55 on Friday, just above the 2,000 lower boundary."
-- Monday Morning Outlook, December 21, 2015

If you approach the market with the simplest of charting approaches, you are not surprised by last week's price action, with the S&P 500 Index (SPX - 2,060.99) mounting a pre-holiday rally from a support area that has been in place for most of 2015. Now, we look ahead to the last trading week of the year -- another holiday-shortened week -- with the SPX trading in the middle of the 2,000-2,120 range, where almost 80% of this year's closes have been between.


"Stocks have historically gotten a boost in the final five trading sessions of the year, with that momentum continuing through the first two trading days of the New Year. Since 1969, the S&P 500 has risen an average of 1.4% over those seven sessions, according to Stock Trader's Almanac. And for each of the seven days, the index has averaged a fractional gain."
-- The Wall Street Journal, December 24, 2015

After the bulls won another battle at 2,000 last week, SPX is now in the middle of its 2015 range, downgrading last week's favorable risk-reward to "neutral." Moreover, the SPX's 2014 close at 2,058.90 is back in play, so expect the bulls and bears to wage another battle this week to determine a green or red finish in 2015. For what it's worth, out of 248 trading days this year, the SPX has closed above its year-to-date breakeven level 159 times, or 64% of the days. This compares to the 89 days, or 36% of the time, the SPX has settled below its 2014 close. From this perspective, the probabilities slightly favor a "green" finish to close out 2015. Per the excerpt above from The Wall Street Journal last Thursday, the final week of the year has historically favored the bulls.

This week also brings 2015's final option expiration, with quarterly options expiring on Thursday. Absent an event that drives the SPDR S&P 500 ETF Trust (SPY - 205.68) below the put-heavy 205 strike, short covering related to the expiration of puts at strikes just below the market could generate a market tailwind, too. Since trading volume will likely be thin, the expiration of these quarterly options could be more impactful than usual. The call-heavy 208 strike could impede progress, however, as call sellers look to defend this strike.


Looking ahead to next year, strategists on average are looking for the SPX to end 2016 at 2,215, roughly 8% above its current level. In 2015, strategists were also expecting an 8% advance, but the SPX has been flat, and other major benchmarks are in negative territory -- with the exception of the Nasdaq Composite (COMP - 5,048.49). Risks most often cited include the Federal Reserve, which just hiked rates and is expected to hike rates four more times in 2016, amid concerns that the economy is weakening and perhaps even entering a recession.

From a contrarian perspective, with strategists expecting another rally in 2016 in the wake of their over-inflated expectations for 2015, one should add inflated strategists' expectations as a risk, too. But this risk is tempered by the fact that not all market participants appear to be on board with the strategists surveyed. Per the table below, retail and advisor surveys, the average exposure of active investment managers, SPX component short interest levels, and the behavior of option speculators indicate a more cautious group relative to this time last year. Such caution improves the risk-reward scenario heading into 2016, relative to 2015.


Another uncertainty that investors will have to weigh is the outcome of the presidential elections. Since 1949, 81% of election years have been positive -- with the average return slightly below what strategists are expecting for 2016, but the median return slightly above strategists' average forecasts. Per the tables below, the first half of an election year has a lower probability of being higher than the second half of the year. 



From a technical perspective, a big question is whether or not the turn of the calendar year will mark major benchmarks finally making sustained moves above key millennium levels that have seemingly acted as magnets in 2015 -- specifically, SPX 2,000 and COMP 5,000. The SPX has re-tested 2,000 on multiple pullbacks since finally making a bold move through this level in October 2014. And COMP 5,000 has simply been a magnet, since the index broke through this level for the first time in years back in March.



We wish you and your families the best during this holiday season. Be safe, and be merry!

Read more:

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The Week Ahead: Wall Street Says Goodbye to 2015


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