2016: Not The Start Expected

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Includes: DIA, EEM, EWZ, HYG, IYE, QQQ, SPY, VWO, XLE
by: Brian Gilmartin, CFA

The S&P 500 fell 2.5% on Wednesday, and is down 5% in the last week.

With the index down about 7.5% YTD already, needless to say, this wasn't the start expected to 2016.

At a Chicago CFA Society luncheon on Wednesday, Jason Trennert, the managing partner of Strategas Research Partners, noted he thought the S&P 500 would be up 10% in 2016, exactly what I was thinking here in mid-to-late December 2015.

With JPMorgan (NYSE:JPM) and Intel (NASDAQ:INTC) set to report on Thursday, January 14, 2016, finally Q4 '15 earnings and '16 guidance aren't just a guess.

So, what's been a surprise so far in 2016 ?

  • Freeport (NYSE:FCX) looks like it is going bankrupt, the way it is trading. Jason Trennert mentioned we might see one major bankruptcy before this correction ends. Chesapeake (NYSE:CHK)? Freeport? Peabody (BTU)? (All my suggestions, not Jason's).
  • Neither Value nor Growth is working this year. The FANG stocks have gotten crushed. Amazon (NASDAQ:AMZN) is down $100 from its all-time, late-December 2015, high. The stock is testing its upward sloping trendline off the 2015 low. It needs to hold here.
  • Back in the bull market of the 1990s, there used to be a graph or chart that circulated which showed that bear market bottoms were put in usually when a big Financial blew up. Continental Bank in the mid '80s, Drexel Burnham in 1990, Orange County and the Mexico devaluation in late 1994 may not have been bear market finales, but they typically marked the end of major corrections. Could be something like that is looming today, in another sector.
  • The dollar index closed at 98.94 today. It hasn't changed much at all, and in fact, is still under its March 2015 multi-year high near 100. A steady dollar or a lower dollar is still, "net-net" a positive, in my opinion.
  • Banks and Financials have gotten just hammered YTD, possibly due to a flatter yield curve. I do think Financials offer good value here. Corporate loan growth should be decent when we hear from JPMorgan, Wells Fargo, Citigroup (NYSE:C), and U.S. Bancorp (NYSE:USB), and will give us a good look at the consumer and corporate loan books.
  • The Russell 2000 is down over 20% from its all-time highs. That is a real bear market.
  • The High Yield (NYSEARCA:HYG) ETF has not made a new 52-week low even with the equity carnage.

Our only change thus far this year is to sell the Brazil ETF (NYSEARCA:EWZ), and depending on the client - some Energy exposure, both of which were added in October 2015.

Clients have no exposure to the Russell 2000, Biotechs (those two are related), Transports, Basic Materials, and have just a 3-4% exposure to Emerging Markets (Long some VWO and EEM) and Energy (XLE and IYE), and yet, I still feel pretty stupid.

Click to enlarge

We'll leave readers with one chart. Some technicians think the August 2015 lows of 1,867 could be tested now. The overnight futures low in August 2015 was 1,831. Note the 200-week moving average on the chart near 1,750.

We get a great look at the big banks' earnings over the next two days. Read the conference call notes.