Did The Market Go Up or Down In 2015?

• This week’s bearish two-bar reversal threatens a bullish seasonal for equities
• Airlines may be set to join railroads and truckers on the downside
• Dollar Index keeps us guessing, which means the next move is likely to be worthwhile
• Pound completes a bearish long-term head and shoulders

The title of this article is usually a pretty easy question to answer because most of the time the market experiences a sizeable gain or a loss during the course of a year. However, 2015 was essentially a trading range, which left the performance of the major averages pretty mixed. If you take the NASDAQ Composite the market went up, not much, but by a tad more than 6%. However, if you take away the six stocks included in the FANG Index (Facebook, Amazon, Netflix, and Google), the NASDAQ was down. The S&P 500 ($SPX) lost a little more than 15 points 2044 versus 2059 or less than 1%.  However, if you add 2% for dividends, the year was up. More broadly based averages, which better reflect the average portfolio, such as the Wilshire 5000 lost 6%. Net-net, it was a down year on a points basis but was certainly no knockout.

The late Edson Gould, arguably one of the savviest technicians that ever lived, observed that “ If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say”. The seasonality I am referring to is years ending in a “5”. There seems to be no reason for their strength but each one has been an up year since the late nineteenth century. That strong seasonality obviously did not develop in 2015 and may tell us something about performance in 2016.

Another seasonal that deserve attention is the so-called “Santa Claus” rally. It extends from the last five trading days of the previous year to the first two of the new year. According to Jeffrey Hirsch in the Stock Traders Almanac, this bullish seasonal averaged 1.5% since between 1950 and 2013. Yale Hirsch, his father, coined the expression ”If Santa Claus should fail to call bears may come to Broad and Wall”. Using the December 23 close of 2063, that would mean a rally in the S&P of 20 points by next Tuesday’s close in order to avoid a visit by the bear. Chart 1 highlights the start of this year’s “Santa” rally and 20 points does not seem to be an insurmountable hurdle, but looking at recent price action, it might be problematic.

Chart 1

Chart 2 shows some of the one and two bar reversal patterns that have developed in the last couple of months for the S&P Composite. Usually, these formations have an effect on prices for between five and ten sessions, as was the case for a bullish outside bar and a bearish two-bar reversal in November. However, the one-day sell-off following the mid-December two-bar reversal shows that this is not always the case. The stakes are quite high for this week’s bearish two-bar formation because we again have a finely balanced technical situation. First, the KST in the bottom window is straddling a sell signal. Second, the market has yet to complete the “bullish” first two trading days of the new month next week. Adding to the excitement is the fact that the price has once again declined and ended the year marginally below its 200-day MA.

Chart 2

Chart 3 shows that two very short-term indicators have started to roll over. These are the PPO with 8/16 parameters and a Money Flow Index (MFI) with a 9-day time span. These are not by no means disastrous developments, but the series of declining peaks offers a hint of underlying weakness. Right now the 10,400 on the NYA is a crucial chart point since a move above would surpass the small December trading range, but more importantly, penetrate the green June-December resistance trendline. That kind of action would be a great New Year’s present allowing us to breathe a lot easier.

Chart 3

Transports and the airlines

Transports were one of the weakest performing sectors in 2015. In this respect, Chart 4 shows that the Dow Jones Transportation ETF, the IYT,  has broken below its bull market trendline and crossed below its 65-week EMA. The relative line is currently resting on its bull market trendline but the recent completion of an upward sloping head and shoulders suggests that the line may eventually be broken. Note that both the long-term KST for the absolute and the relative price are in a clear-cut downtrend.

Chart 4

This softness was spear-headed by the railroads and truckers, as we can see from Charts 5 and 6. Railroads ($DJUSRR) have violated both their absolute and relative 2010-2015 up trendlines and KST action is again negative.

Chart 5

The Trucking Index ($DJUSTK) has also violated both the price trend and the relative strength trend. The truckers situation is arguably worse because the relative strength line peaked years ago and has diverged significantly with the Index itself for about 4-years. Since the absolute and relative bull market trendlines have only just been violated further downside action appears likely. This view is based on the observation that relative price action usually leads absolute prices.

Chart 6

Airlines ($DJUSAR) have so far remained unscathed except for a violation of the two bull market trendlines in Chart 7. It’s true that both long-term KSTs are declining, but the Index itself and its RS line remain above their respective 65-week EMA’s, so it’s not an outright bearish situation given current evidence.

Chart 7

Chart 8 tells us that we are likely to find out pretty soon whether Airlines are going to experience a similar fate as railroads and truckers. Right now they are caught in a very delicately balanced technical situation since the price is resting just above its 200-day MA. Secondly, this is also the neckline of a potential head and shoulders pattern and the 2014-15 up trendline.  A drop that holds below 235 would confirm the violation of this support. The KST is underscoring the very fine state of balance as it is been uncharacteristically flat since the beginning of December. Perhaps the most interesting development was the false breakout above the horizontal green trendline. Whipsaw moves such as this do not always result in serious price erosion, which is why I like to see some confirmation. In this case, that would come with a break below 235.

Chart 8

The dollar and the pound

The Dollar Index remains in its recent trading range and needs to clear the green resistance line in order to give the all clear. Both momentum indicators in Chart 9 are bearish but it looks as though the KST in the bottom window, may be in the process of reversing. I have noticed a tendency for the January performance of the Dollar Index to break in the direction of the prevailing trend (up in bull markets and down in bear years). With momentum so finely balanced the opening sessions of 2016 will likely provide a clue in that direction. However, until the Index can move above the green line the bull market will not be re-confirmed.

Chart 9

Finally, Chart 10 indicates that the pound is vulnerable, as it has just completed a head and shoulders pattern. Equally important is the fact that the KST has just gone bearish, and is by no means oversold. The reason for weakness may well lie in the possibility that the European referendum will be brought forward thereby compounding the uncertainty. If there is one thing that markets abhor is uncertainty.

Chart 10

Good luck and good charting as well as a happy and prosperous 2016.
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.