I only have made 1 forecast for the entire year in each of the past 4 years. The market rarely does what the majority thinks it will. So I do my best to be sure that I am not in the majority. Last year I was neutral expecting choppy action when everyone else was very bullish. This year with many bears, therefore I do see another sideways year this year, but with a strong finish. Why? Read to the end.
Here are the very bullish factors supporting stock prices: 1. We have likely seen a massive wipeout of margin long positions here. I need new data to confirm. 2. We have blown up psychology with massive bearish psychology at hand. (This is very bullish) 3. We have a weakening dollar (this is bullish) 4. We have very low interest rates (this is bullish) 5. We have very low input costs (oil and labor, this is bullish) 6. We have a massive melt-down in biotech happening (this is bullish) 7. We have a 25% corrections in place in the Nikkei and the DAX (this is bullish) 8. Massive bearish sentiment by major brokerage firms for 2016. (Last year they were all bullish looking for an up-year of 10% on average and they were all wrong) 9. Terrible technical conditions (breadth, divergences, etc) - These work in contrary ways. Everyone sees them as negative. They are negative when people are selling to raise cash (which is bullish). 10. Very high corporate profit margins (very bullish). 11. Plenty of corporate cash on hand for mergers and acquisitions (bullish)
So the foundation of the market is very very constructive from many perspectives.
The negatives are: 1. Rapidly rising default risk around the world as ZIRP and NIRP takes hold. 2. Falling PMI's signal softening economic activity 3. Corporate Buybacks can't continue forever, especially with rising default risk 4. Rising rates to corporate borrowers (Rising yields on HYG, falling HYG prices) 5. China: Weakening outlook. Drawdowns in reserves to support an overvalued currency. $99 billion drop announced today to the lowest levels since 2012. 6. Jobs numbers in the US have massive seasonal adjustments which are hiding the worst numbers we have had in many years. 7. Demographic challenges means that US Growth will stay low (and steady) for two more decades. Read Harry Dent's books. 8. China's demographics are where Japan's were in the late 1980's and very bearish long term.
Those are the main points that I have in my head at the moment that will see-saw prices back and forth across the range for the remainder of the year.
The reason for the strong finish to the year? The election will be out of the way. The election is having profound impact on psychology and the year-end will be a strong quarter, I do feel.
The low 1868 is for the balance of the year from now, Sunday February 8, 2016 1880 last SPX500
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41 likes out of 1744 views as of Feb 10th at 3:30PM. This is my normal 2.5% or less "agree" rate.
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Great rally out of the bottom end of the range. The 1812 low held from the "panic-1812" bottom forecast from last year. Overall, I think you can see that big rallies can occur from periods of very low optimism.
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So far, we put in the bottom for the year despite all of the bad news, Presidential election disaster, Negative Interest Rates (which is really QE Infinity). The low at 1812 looks like it is far enough in the rear-view-mirror.
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I think we are putting in the "RELIEF" rally high here. The rally happened faster than I labeled it out, but it looks like we have "HORROR" ahead of us. The reason for the rally? Well, how about the reason for the decline first. 1. Foreign currency trade unwinding from new regulations reducing leverage in currency trading forced traders to buy back their short-Yen positions and close out their corresponding trades that were financed with cheap and weakening Yen. 2. Crude oil - trying to find a bottom, and then bottoming/rebounding on short covering to the $40 level from $30-$26 at the low end. 3. Earnings forecasts dropping - led to a drop in valuations 4. Presidential elections - The extensive rhetoric the candidates throw around makes people nervous. As candidates drop out of the race, people are comforted. Overall, I believe America is very nervous about the current slate of candidates, which keeps a lid on the market this year overall. 5. M&A - China has already completed more M&A deals than all of last year, which was more than any other year. So, fears of China collapsing led to the decline and the rebound has been from people realizing the fears may be overblown. 6. Corporate buybacks - buyback are running stronger than at any time in the past. I did not foresee this in my previous comments. The fact that there are no projects or takeovers to complete tells me that valuations are "fair" for competitors and that there is ample credit available to corporations and there are no great investments to make in plant & equipment. This all speaks to a flat market for the year. 7. People who believe a weak January means a weak overall stock market may have sold out, but I sure hope very few people follow an investment strategy based on such ephemeral analysis. 8. Margin debt accounts may have waited until the New Year to sell positions to push capital gains into the following year, which is tactical. The level of Margin Debt is so closely correlated to the stock market index that it is truly a sign of investor confidence. However, it is not leading or lagging, but we get the data with a delay, so you have to be creative with this analysis. 9. The Fed: The December tightening forced investors to consider unloading shares and then by the time January-February came around, Japan went to Negative Interest Rate Policy (NIRP) to join Sweden's NIRP and the Fed said that negative rates could be considered a policy option in the future and all of the sudden we have an environment of Fed accommodation, which helped the market return to its previous price levels. 10. SO THERE you have it. I suggest you follow @LizAnnSonders at Twitter as she has the best fundamental data out there in beautiful graphs and common sense explanations. You'll really appreciate it if you check her out.
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Nearing the "top end" of the forecasted range for 2016 where I put 2112 as the "Euphoria" level for year end, which would be AFTER Presidential elections. I don't see "Euphoria" here at all. This is a very strong relief rally, but there is not a lot of "belief" to go with it. There is a lot of doubt about Central Bank's ability to keep money cheap and deep concerns about levels of debt. Shorter term traders are heavily short the market here and investors are not committed to the long side here. We have a strong "wall of worry" to keep climbing and grinding higher. I will be on the lookout for how companies react to earnings reports this week (April 18th-April 22nd) to find any new information. Last quarter earnings of the DJIA components beat expectations (substantially lowered, of course) in 29 of 30 stocks. I would expect the same again this quarter. What we need to watch for is forecasts for revenues and comments by CEO's about margins. Remember though, keep an open mind. I believe there was very little faith in a market bottom earlier this year when I was outlining all of the reasons why we were bottoming. Now I see a lot of doubt about the rally as it reverses all of the losses from the 4th quarter. I look forward to your comments and questions and finding the right time to exit the long side of this market.
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My comment below from "15 days ago" "Ready to update given the swift lift in sentiment to multi-year high readings... a top is near. It looks as if we hit 'euphoria' on the likely nomination of Clinton for the Democratic Party. Earnings were lackluster for the latest reporting period and the US Dollar has slightly helpful year-over-year rates of change. I'll suggest writing 6-9 month AT THE MONEY CALL OPTIONS against any market positions. With VIX elevated to 17 from a recent 13, this could be a decent return as I assume a sideways market for the balance of the year. 2096 last SPX." I hope you all took notice. Tim
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As for the GUESS for the DJIA's earnings PRE-EARNINGS season, it was for a total of $38.27 and it came in at $37.85. SO, that means earnings were revised down through the course of the earnings season and then the companies (27 of 29 so far) BEAT those lowered estimates (1 trailed, 1 tied). Which goes to show you that if you can't forecast correctly, forecast OFTEN! That way people ultimately forget what you forecasted. This is how the system works. The comments from 5 months and 3 months ago are still decent. The recent drop of 394 point (>2%) in the DJIA heading into the 15-year anniversary of 9/11's crash has everyone's nerves on end. And now the the Presidential race a total disaster, HIllary's health in question, Trump's sanity perennially in question, and lackluster earnings forecasts, war-mongering everywhere in the world from North Korea setting off an atomic bomb, and the eternal "China is imploding financially" calls, and it makes for feelings of "DESPAIR". It is quite interesting to have this level of negativity and despair when we are just a little bit off all time record highs. I'm still staying with the forecast for the year, which is sideways. I'll be in the "KEY HIDDEN LEVELS CHAT ROOM" if you need me.
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Extreme bearishness is rampant, especially from the AAII survey which is down to a 5-year low of 22% bullishness. This is nothing short of remarkable, but it is understandable given the vile attacks going on between the Presidential candidates and the lack of sound judgement from either one of them (especially the 4-minute delay to launch our nuclear response), the lackluster earnings forecasts, the withering economic activity (as we watch the unhappy future for the United States from either one of these candidates), rising crude oil prices, Russian aggression, attacks on humanity (even crazy clowns, and police shootings), and the extremely biased news reporting by the media (covering the ultra-sad state of affairs in the US). The ultra-bearish comments by billionaires over the course of the past few months has us all still nervous and the constant "chicken little" calls about China collapse weigh on our collective consciousness. Brexit fears still are high and Draghi's ECB actions are never enough. The banking system in Europe is still highly leveraged and losses haven't been recognized yet. How do we stay positive amidst all of this negative news? Well, by understanding that people are already on the sidelines sitting in cash waiting for prices to fall. In reality, we need to have sellers to drive prices down. So, there may not be a reason to buy, but the reasons to sell are behind us.
So, what are we to do? Calmly, patiently watch the next 15 days as the companies report earnings and forecasts for the next quarter. Expect guidance down as things have softened in the past few weeks.
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I think we may have seen "DESPAIR" last night as the election results rolled in and the S&P futures were lock limit down at -5%. The USDMXN had surged to near 21, up nearly 10% from 18.5 that day. Crude oil was down $2 to $43 as bears piled on to get the market to break support levels to trip more sell orders. Sentiment is about as bleak as I've seen it in many decades and with the stock market "appearing" to be rolling over to most people and with earnings softening. The market looks further out than one quarter, but we need perspective and time will provide that for us. For now, I'm sticking with "muddling along" sideways. Stocks may look like they have a long way to fall, but it doesn't mean they have to. The market is awash in cash (that's the bubble, by the way, cash holdings) and also in short positions which will support the market on any declines. Keep your head firmly on your shoulders and look at the values you can find in the market: Airlines, Automotives, for example, have strong earnings and cash flow yields.
See you in the "Key Hidden Levels Chat Room".
Tim Nov 9, 2016 7:31AM EST
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My 7:31AM on Nov 9th comments saying the market is at a bottom are hopefully worthy on note and attention. The market had come off of "lock limit down" so In hindsight you might say "Well, it was obvious" but I think you can consider sharing the link to this page to your friends and acquaintances who could use a wise word or two from time to time. Encourage them to "follow" me here at TradingView and to navigate these markets week by week (not minute by minute). I don't overwhelm you with endless trading ideas and non-sense. Instead, I show you the big picture and give you reasonable logic by which to make a decision, using a combination of market sentiment and fundamental valuation to back up my point of view. I look forward to hearing from you and hope you can spread the word about TradingView and "those annual forecasts from Tim West". November 19, 2016 5:40PM EST
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2017 FORECAST - S&P500 INDEX - Daily
Here we are again: January of a new year. The election is behind us. And the recount is behind us too. So many bombs dropped over the last year, both real bombs and word-bombs by Presidential candidates. The word-bombs seem to get all of the attention with Trump winning the "best word bomber" last year by Time Magazine as the "most noteworthy" person in the world. Now with that out of the way, once again we have the same variables facing the market: plenty of headwinds and tailwinds. See 2016 list, to your left in blue.
I like to start with an understanding of what "expectations are out there" and I do that with the Wall Street consensus for the Year-End S&P500. I added that with the RED BOX at the top which is around the 2300-2400 range. There are some above and below that range, but that gets 90% of the estimates.
The 2085 level was the launching point of this latest advance from before the election and that level was retested in the hours after the election results indicated Trump the winner. The market action up until that point, together with the lowest-ever-50-week readings of AAII Investor Sentiment Readings indicated to me that we had COMPLETED a bear market at this point in time. I view a bull market as 20%+ so a move to $2500 in the S&P would accomplish this technical feat. With plenty of skepticism, fears aplenty, high cash, massive retail selling of equities and mutual funds, high short positions, and "no bear market in prices" suggests very strongly that a 20% rally from 2085 is likely, and possible.
What I foresee happening in the first half of the year is the time window for Trump to get the most on the table for pro-growth, tax-cut, red-tape-cutting, Obama-care bashing, "Make America Great Again" pushes for change in the House and Senate. I hope we see Reagan-like Investment Tax Credits, Cuts in capital gains tax rates for young and small investors to get investment capital moving and to get banks lending again.
The second half of the year, especially towards the end of the year, I foresee a correction in prices back to the start of the year on signs that there is friction in the Republican Party and fears to make bold and broad changes to the tax laws and concerns about the credit rating and borrowing capacity of the US. The Democrats will be stalling with threats to shut down the Gov't and doing everything in their power to stop the changes Trump is pushing through.
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reversalradar
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Here are the very bullish factors supporting stock prices:
1. We have likely seen a massive wipeout of margin long positions here. I need new data to confirm.
Good point. I didn't think about that...
2. We have blown up psychology with massive bearish psychology at hand. (This is very bullish )
Yes perhaps, but I'm a broker and I see people start to come sell now, and that is typically a sign that the tide is turning to bearish, I'm still thinking there needs to be a bear market for about six more months before markets can enter a new bull. Your later point about the election would serve as a good catalyst, so make it 9 months...
3. We have a weakening dollar (this is bullish )
Interesting you see it this way, I see the dollar getting stronger, this recent pattern seems to be more consolidation for a continued rise given the US is leading the world in the tightness of their policies. With Japan and Europe loose and the US staying pat or tightening this gives us a relative tightening effect, no? IBD has a huge headline in last nights paper saying the strong dollar having an effect on earnings...
4. We have very low interest rates (this is bullish )
Agreed. They got weaker, and seem to continue to even as the Fed tried to tighten... bullish or bearish? Typically bullish yes, but isn't this a bit concerning that even when they tighten, the rates still drop?
5. We have very low input costs (oil and labor, this is bullish )
Agreed, but the effects this brings are to profit margins more than revenue gains, guidance has been poor from many companies on 2016 revenue targets.
6. We have a massive melt-down in biotech happening (this is bullish)
Not sure how this is bullish...
7. We have a 25% corrections in place in the Nikkei and the DAX1.17% (this is bullish )
How so? I am not trying to argue, just to understand the reasoning behind why a selloff in what have been stronger economies markets is bullish for us...
8. Massive bearish sentiment by major brokerage firms for 2016. (Last year they were all bullish looking for an up-year of 10% on average and they were all wrong)
Yes, to me it seems they are trying to bring down the markets. I believe they have put shorts in place over the last 6 months as the volatility escaped the index it was from liquidations on limit sell orders essentially slowly exiting and distributing their shares so they could time harder shorts with the first rise in rates from the Fed. China helped them out with a few news events as well.
9. Terrible technical conditions (breadth, divergences, etc) - These work in contrary ways. Everyone sees them as negative. They are negative when people are selling to raise cash (which is bullish ).
Why is selling to raise cash bullish?
10. Very high corporate profit margins (very bullish ).
Yes, this is definitely bullish. The valuations are very nice on a lot of companies now too, I look at the fundamentals and have made long purchases, but they are getting rocked and if we see that break of the 1850 or 1800 level I think we will have a nice finish to the bear market with that drop. However, there is some talk of Euro banks in big trouble, and now if this news hits us, its definitely going to be a worse crash than 2008.
11. Plenty of corporate cash on hand for mergers and acquisitions ( bullish )
Yes, this is true, but wouldn't this be more bullish if instead of merging we were buying machines and adding jobs to GROW the economy instead of moving assets from one place to another? This M&A activity to produce earnings growth typically happens more at the end of bull markets.
So the foundation of the market is very very constructive from many perspectives.
The negatives are:
1. Rapidly rising default risk around the world as ZIRP and NIRP takes hold.
To me, this is still something people don't think can happen, so this is the place to bet, take a small option on euro banks failing and it might pay off big, meanwhile the US index will continue to move down or sideways...
2. Falling PMI's signal softening economic activity
Why is there softening activity if the input prices are lower? Why is demand lower? This doesn't make sense to me...
3. Corporate Buybacks can't continue forever, especially with rising default risk
Ok, true, but they can definitely go for much longer than usual because of all that cash, you just said that...
4. Rising rates to corporate borrowers (Rising yields on HYG-0.14% , falling HYG-0.14% prices)
Rates have been a surprise. I work at a LARGE us bank, and we've been on a hiring freeze for 6 months, and now I'm hearing of some layoffs coming...
5. China: Weakening outlook. Drawdowns in reserves to support an overvalued currency. $99 billion drop announced today to the lowest levels since 2012.
Currency wars... still would love to talk through how this is logically to play out... if we do this and Japan does that, then what does that mean? Would love to read your thoughts on the Game Theory of Currency Wars...
6. Jobs numbers in the US have massive seasonal adjustments which are hiding the worst numbers we have had in many years.
I'm unaware of how bad this is... I don't see why job growth wont get going... is it Obamacare? Is it a strong dollar so want to hire abroad? Is it the election coming? If Sanders is elected president, I think we will see the stocks crash just on that alone, and I'm not kidding.
7. Demographic challenges means that US Growth will stay low (and steady) for two more decades. Read Harry Dent's books.
Hmmm... interesting. I'll have to check that out.
8. China's demographics are where Japan's were in the late 1980's and very bearish long term.
Interesting as well. Very long term trend, but interesting none the less.
I hope you don't take offense to my comments. I write them only to read your replies, because I'd like to know how my own thinking may be incorrect. This is an AWESOME post, and you could really make an article about each point on your list supporting it with evidence and it would make quite a read. I'd definitely read every word. Reading your post made me much more bullish, I was one of those bulls that has turned bearish I'm afraid to say. But I don't feel right about bailing on my positions because it seems the challenges are minor compared to the health of the firms fundamentals. I think all this could very well blow over. But when I look at past market tops and how we have consolidated to the right side of the trend line, and have failed to achieve higher highs and it's been a 7 year run, it seems due to really correct now. It just looks ripe to plunge... just does I don't know. I was surprised it didn't today to be honest. It has been a long time coming too with all the slow movement the 2nd half of the year. Maybe that makes me a bad investor, because I could be being weak, and I could be wrong, I frequently am, but it's just my view... markets don't need a reason to sell off other than people want to take profits.
Thanks for the clear numbered list and organized thoughts,
Mazer Rackham
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I read your reply yesterday Mazer - Thank you very much for your comments.
I didn't have an hour to reply to you yesterday but my instant replies are the following:
1. It is bullish when markets around the world are in a bear market because that means they have already gone down by dramatic amounts (20% or more, many 25% or more). That contagion selling has already had an impact on selling here. If you see companion selling in the DXY when foreign markets are going down, it means foreign investors are liquidating their US investments, which from a contrary-perspective, is bullish. Some of the best market bottoms I saw through the 1990's were when foreign selling dominated. It tends to turn on a dime as value investors buy slowly and once the selling is done, they can ramp the prices back up swiftly.
2. What the conundrum is with corporate cash, as stock prices go down, corporations see that buying back stock isn't going to help much and keep the capital for business expanding deals and for dry gunpowder in case times get tough. Oddly, corporations are more retail-oriented in the last 10 years, buying stocks back when they are HIGH and selling shares when prices are LOW. So, the cash will be used for DEALS in my opinion and not for buybacks.
3. As for input prices lower versus economic softening, this is a somewhat reflexive process, but for the end-user consumer, lower input prices allows for higher consumption, higher savings, and higher investment. All of these things are bullish and the reason why retail spending is holding up better than people think. We are in a steady sideways pattern here from a demographic perspective and with low leverage at the consumer level and the banking level, we don't have the same risky profile that Europe has.
4. China is a fascinating twist to all of this market action - China's conversion to a consumption economy will take awhile, but they now have all of the infrastructure in place, they just need economic activity. Similar to the "build it and they will come" from the Kevin Costner movie. First you build the stadium and THEN you have the ball games and sell food, beer, popcorn, hats, tickets, etc. They have the stadiums, they just need some time to fill the ball parks. So, I'm not as bearish as everyone else in this regard.
I'm sure there will be more questions:
Thanks again for your questions and comments. Feb 12, 2016 12:46PM EST
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1. I love this explanation to point 1. Excellent as my gut and perception of all the tickers I'm looking at tell me value stocks are already starting to rebound. It's been a hard year for some of these stocks I love such as GPRO, SWKS, and now even CMG and AAPL. These stocks I especially love because they are growth at value numbers and PEGs are looking tasty (ok GPRO had a bad earnings, but then the street gobbled it up... and what is up with TWTR? Up 11% today... I also saw GRPN have lift off yesterday, settlement and earnings, still a crap numbers but its so low it will probably follow through tomorrow. Do I smell acquisition in the air...? but I remember 2009, and I remember Jim Cramer wanting to pounce in Nov and Dec of 2008 and just complaining and whining how ridiculous the valuations were getting because he jumped too soon, so I don't think we are necessarily there yet. BUT... this foreign selling point is new idea to me, and I thank you for it because it was just a few days ago I saw the whole market tank and GPRO was holding up at 7% gain... hmmm.
2. Is there a way to track this? How would you look for M&A targets? Any fundamentals you look for?
3. If Citi, Deuche, Santander, and other euro banks come out with some kind of trouble is it not going to have contagion in the US Banking sector? Did not all the financials slide yesterday when these banks reported some kind of problems? I saw some guy on CNBC talking about a Euro bank crisis coming, he put out a bad bank list that included Citi, Deuche, and many others.
4.Interesting... So when would you change your mind from a neutral to a bear or a neutral to a bull? I would love a detailed answer on how an educated and EXPERIENCED trader systematically evaluates the market and adapts his views...
As an interesting follow up, how do you implement these ideas as well? Do you gradually just go more and more short the lower the market goes until you see something that makes you take some off and then some more off if the market comes up? Or do you have some other way of managing your short / long weighting? I have nothing short but my entire 401k went to cash on Nov 7 when the markets instead of rallying to new highs out of that chinese flash crash double bottom, sold off hard as soon as we got close. That was the day I pulled my money. Id like to get short the index and ride it down since I'm wanting to hold my stock positions in the value companies I own, but I'm not sure what entry would be the wisest. I think (and yet this is speculation and some research I did on 2007 market top) we will head to 2000ish level once more before it breaks lower. In 2007, there was one 1.0 fib retrace and TWO .61 fib retraces in the index before it hit crash day in 2008.
If my logic stands to reason, and it may not, since its different time now and different things going on, but it seems like the onset of the bear market in 2007 to me because I anticipate it going slowly downward for a while, until November elections to be honest. So, I think there will be chances to make money on both sides as you do, but I think it will remain a bear market more than bullish... depends on how much and steep we can correct though doesn't it? Anyway, how would you advise a newer trader to manage his money?
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Oops it was Nov 12 not Nov 7 btw
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Thanks for all of your comments: I will see if I can address your concerns.
1. US Banks do not have the amount of leverage they had in 2007-2008 when they reached 33 times equity to 40 times equity. They are down to 10-11 times now and have significantly less exposure to energy. Investors are bearing the brunt of this investment loss cycle in energy. Time will tell and if the facts change I will do my best to change my opinion. In 2007 I was calling the top of the market cycle based on the repetition of the 1973 top which aligned on so many levels that I was forecasting a 50% drop in the market because of the deleveraging cycle that was coming. We do not have that deleveraging cycle now. We have a horrible demographic cycle which will keep our economy nearly dead for the next 15-20 years, so I am NOT expecting anything much in US GDP. The biggest risk we have now is lack of leadership by our Government in the US and perhaps going down the path of poor tax and spend decisions. Trump scares me in this regard with his negative attitudes about the current state of trade. (I'm going to have to come back later to address your many other points).
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Hahah, i have never been in US and i still have the same concerns about Your leaders, Trump especially ( i dearly hope that he does not win...but frankly, Hillary is not the best either.).
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Both candidates are terrifying to me, but I can only be thankful for the checks and balances in the system that will prevent any President from ruining the nation. Thankfully the House and the Senate are great counter-balances. The history of the country of the USA is best described by the make-up of the House and the Senate then it is by the leader.
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In my view, it is less predictable with Trump. And noone likes that - i really dont know a showman who does not hold most of his words being president.
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To understand why go pro was up then, look at it now. Sometimes these high beta, beaten down, shorted stocks have this strenght and tend to carry on. It is up 10% today.
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Alas! Glad to see this. Thanks Tim, for every pain.
1. We have likely seen a massive wipeout of margin long positions here. I need new data to confirm.
Good point. I didn't think about that...
2. We have blown up psychology with massive bearish psychology at hand. (This is very bullish )
Yes perhaps, but I'm a broker and I see people start to come sell now, and that is typically a sign that the tide is turning to bearish, I'm still thinking there needs to be a bear market for about six more months before markets can enter a new bull. Your later point about the election would serve as a good catalyst, so make it 9 months...
3. We have a weakening dollar (this is bullish )
Interesting you see it this way, I see the dollar getting stronger, this recent pattern seems to be more consolidation for a continued rise given the US is leading the world in the tightness of their policies. With Japan and Europe loose and the US staying pat or tightening this gives us a relative tightening effect, no? IBD has a huge headline in last nights paper saying the strong dollar having an effect on earnings...
4. We have very low interest rates (this is bullish )
Agreed. They got weaker, and seem to continue to even as the Fed tried to tighten... bullish or bearish? Typically bullish yes, but isn't this a bit concerning that even when they tighten, the rates still drop?
5. We have very low input costs (oil and labor, this is bullish )
Agreed, but the effects this brings are to profit margins more than revenue gains, guidance has been poor from many companies on 2016 revenue targets.
6. We have a massive melt-down in biotech happening (this is bullish)
Not sure how this is bullish...
7. We have a 25% corrections in place in the Nikkei and the DAX1.17% (this is bullish )
How so? I am not trying to argue, just to understand the reasoning behind why a selloff in what have been stronger economies markets is bullish for us...
8. Massive bearish sentiment by major brokerage firms for 2016. (Last year they were all bullish looking for an up-year of 10% on average and they were all wrong)
Yes, to me it seems they are trying to bring down the markets. I believe they have put shorts in place over the last 6 months as the volatility escaped the index it was from liquidations on limit sell orders essentially slowly exiting and distributing their shares so they could time harder shorts with the first rise in rates from the Fed. China helped them out with a few news events as well.
9. Terrible technical conditions (breadth, divergences, etc) - These work in contrary ways. Everyone sees them as negative. They are negative when people are selling to raise cash (which is bullish ).
Why is selling to raise cash bullish?
10. Very high corporate profit margins (very bullish ).
Yes, this is definitely bullish. The valuations are very nice on a lot of companies now too, I look at the fundamentals and have made long purchases, but they are getting rocked and if we see that break of the 1850 or 1800 level I think we will have a nice finish to the bear market with that drop. However, there is some talk of Euro banks in big trouble, and now if this news hits us, its definitely going to be a worse crash than 2008.
11. Plenty of corporate cash on hand for mergers and acquisitions ( bullish )
Yes, this is true, but wouldn't this be more bullish if instead of merging we were buying machines and adding jobs to GROW the economy instead of moving assets from one place to another? This M&A activity to produce earnings growth typically happens more at the end of bull markets.
So the foundation of the market is very very constructive from many perspectives.
The negatives are:
1. Rapidly rising default risk around the world as ZIRP and NIRP takes hold.
To me, this is still something people don't think can happen, so this is the place to bet, take a small option on euro banks failing and it might pay off big, meanwhile the US index will continue to move down or sideways...
2. Falling PMI's signal softening economic activity
Why is there softening activity if the input prices are lower? Why is demand lower? This doesn't make sense to me...
3. Corporate Buybacks can't continue forever, especially with rising default risk
Ok, true, but they can definitely go for much longer than usual because of all that cash, you just said that...
4. Rising rates to corporate borrowers (Rising yields on HYG-0.14% , falling HYG-0.14% prices)
Rates have been a surprise. I work at a LARGE us bank, and we've been on a hiring freeze for 6 months, and now I'm hearing of some layoffs coming...
5. China: Weakening outlook. Drawdowns in reserves to support an overvalued currency. $99 billion drop announced today to the lowest levels since 2012.
Currency wars... still would love to talk through how this is logically to play out... if we do this and Japan does that, then what does that mean? Would love to read your thoughts on the Game Theory of Currency Wars...
6. Jobs numbers in the US have massive seasonal adjustments which are hiding the worst numbers we have had in many years.
I'm unaware of how bad this is... I don't see why job growth wont get going... is it Obamacare? Is it a strong dollar so want to hire abroad? Is it the election coming? If Sanders is elected president, I think we will see the stocks crash just on that alone, and I'm not kidding.
7. Demographic challenges means that US Growth will stay low (and steady) for two more decades. Read Harry Dent's books.
Hmmm... interesting. I'll have to check that out.
8. China's demographics are where Japan's were in the late 1980's and very bearish long term.
Interesting as well. Very long term trend, but interesting none the less.
I hope you don't take offense to my comments. I write them only to read your replies, because I'd like to know how my own thinking may be incorrect. This is an AWESOME post, and you could really make an article about each point on your list supporting it with evidence and it would make quite a read. I'd definitely read every word. Reading your post made me much more bullish, I was one of those bulls that has turned bearish I'm afraid to say. But I don't feel right about bailing on my positions because it seems the challenges are minor compared to the health of the firms fundamentals. I think all this could very well blow over. But when I look at past market tops and how we have consolidated to the right side of the trend line, and have failed to achieve higher highs and it's been a 7 year run, it seems due to really correct now. It just looks ripe to plunge... just does I don't know. I was surprised it didn't today to be honest. It has been a long time coming too with all the slow movement the 2nd half of the year. Maybe that makes me a bad investor, because I could be being weak, and I could be wrong, I frequently am, but it's just my view... markets don't need a reason to sell off other than people want to take profits.
Thanks for the clear numbered list and organized thoughts,
Mazer Rackham