There is plenty of doom and gloom to talk about and scary charts to explore, but first ….
Here’s an amusing story (not necessarily true) courtesy of a tax attorney who led a seminar I attended. Who knew that tax attorneys have a sense of humor?
A company was relocating to Knoxville and needed an office manager. The owner of the company was a Harvard man and the candidate search had come down to two applicants – a Harvard alum (H) and a UT grad (T). The owner decided to give the two candidates a test to determine which to hire. After the test, the owner sat down with H and told him he did not get the job. Here is the conversation that ensued:
H: What was my score on the test?
Owner: You answered 9 out of 10 questions correctly.
H: How did that compare to T’s score?
Owner: He also answered 9 out of 10 questions correctly.
H: Since we both got 9 answers right and I graduated from Harvard as you did, why don’t you give me the job?
Owner: My decision was based more on the answer to the question you got wrong.
H: What do you mean?
Owner: Well, T missed number 7 and answered, “I have no idea”. You missed the same question, but your answer was “Neither do I”.
Life and the stock market are all about perspective. The S&P 500 hit an all-time closing high of 2,130.82 on May 21, 2015. On Friday, December 11, 2015, the S&P fell 1.94% for the day to close at 2,012.37. The S&P 500 has lost 5.56% since the high in May.
Remember the panic in August of this year when the S&P 500 fell 11% in six days? The closing low then was 1,867.67. The index has gained 7.75% through Friday since that low. So, we have a perfect test case of the glass half empty, glass half full approach to life. Will you focus on the 5.56% loss since the high or the 7.75% gain since the low?
The Big Picture
The S&P 500 has been in an upward sloping channel for the last 4 ½ years. The good news is that the channel is still intact. The bad news is that since the high back in May, the index has made a series of lower highs and appears to be getting weaker and weaker. It is possible that it gets so weak that it falls out of the channel and into a major correction.
As we close out the year, there are two index levels to keep in mind: 2,120 and 1,980. If the S&P 500 can close above 2,120, we have likely pierced through the lower high line, which would be very bullish. On the other hand, if the index falls below 1,980, the multi-year upward channel may be history. Friday the index closed at 2,012.
December is traditionally the best month of the year for the stock market. Since 1950, the S&P 500 has averaged a 1.67% increase in December (courtesy of Kimble Charting Solutions). A less well known fact is that the first two weeks of December are normally flat to down. A bottom has historically occurred between the 15th and 17th of December and from that point the fabled “Santa Claus” rally has begun. Given the terrible week in the markets we just witnessed (S&P 500 down 3.69%), we’re either in for a heck of a rally for the last two weeks of the month or Santa won’t be coming this year.
The final chart below shows that a short-term bottom is possibly close at hand. The chart shows the S&P 500 from the low point in 2011 to the present. It also shows two indicators that measure extremes:
VIX – is the symbol for the Chicago Board Options Exchange Volatility Index which shows the market’s expectation of 30 day volatility. When the VIX spikes higher and rises above the 22 level, as it did on Friday, it can signify a short-term bottom.
The McClellan Oscillator measures the short-term breadth of the market. It is calculated using moving averages of the number of stocks on the New York Stock Exchange that are advancing versus declining. In rare cases the Oscillator goes below the -225 level. When that happens, as it did on Friday, it also can signify short-term bottom.
The blue arrows on the chart show the times that the VIX has risen to a level above 22 and the McClellan Oscillator has fallen to a level below -225 at the same time. You can see that this a fairly rare occurrence. Each previous time both indicators have signaled extremes, the market was either at a bottom or very close to one. If the indicators are right this time, we should see a rally sometime next week.