State of the Stock Market Analysis for the Week Ending December 26th, 2015 (Santa Clause Rally Loses MomentumĀ 12-26-15) All You Need Is Jobs

Stocks closed mixed and flat on Christmas Eve, which was a disappointment for the bulls who were hoping for a rip-roaring Santa Claus Rally to close out the week. It was a decent week, though, and the major indices are in a good position to carry the upside momentum into next week. The 4% bounce in the price of oilĀ on Wednesday was followed by another gain of more than 1%, so after bottoming near-term at around $34 per barrel this week, oil closed out Christmas Eve at about $38. We all know that most global market strategists warn of economic troubles if oil dips below $40 per barrel, so maybe we can see oil rise back above that price level next week.

It has been a rough and tumble year for the stock market, and we have zigged and zagged for most of the year above and below breakeven through the beginning of August. The entire year through August was marked by mixed economic news and mediocre earnings news. The worry of “if and when” the Fed would finally raise rates hovered like a dark cloud above financial markets, but the Fed stayed on the sidelines until the recent December rate hike. Every time it looked as though the Fed would raise interest rates, we would get a bad GDP number or a weak employment number, and the Fed would back off from a rate hike.

Global GDP worries also weighed on the Fed, and it remained extremely cautious about “upsetting” global financial markets. Then, as the Fed meeting in August was nearing, China devalued its yuan by 3% in the early part of the month. Some strategists think that China did the devaluation as a “pre-emptive” strike against a Fed rate hike. China’s economy was dramatically cooling down, and the last thing China needed was higher U.S. rates occurring exactly when China’s economy was faltering. The yuan devaluation set in motion a stock market decline in the U.S. that lopped about 10% off the S&P 500 by late September, and for a time there, it looked as though we might get an “October to Remember.”

The Fed held off on rate hikes following the China devaluation, and once stocks bottomed in late-September, we were off to the races for the stock market. October saw a big rally, and the S&P 500 regained most of the 10% decline in short order. The harrowing dip of August and September gave way to one of the best October performances for stocks in history. As the snapback rally peaked at the beginning of November, it suddenly ran out of upside steam. It looked as though the troubles had passed, but the upside energy fizzled. We had a pullback, and then we saw investors begin to worry about the Fed and its December meeting.
The Fed got enough good economic news in late-November and early-December that it began to hint strongly at a December rate hike. It committed to a December rate hike, and it said it would remain “data driven” concerning rate hikes into the future. We eventually did get that Fed rate hike, and the stock market rallied. Stocks had a rough week following the Fed rate hike, and last Friday’s plunge seemed to say that maybe investors really WERE upset at the rate hike and were concerned about the fallout for financial markets.

What we saw this past week, however, was a boost in investor confidence, and stocks notched a solid win even though Christmas Eve’s shortened session closed out flat and mixed. It was a great pre-holiday week for investor confidence, and the bulls are hoping that we see a repeat performance next week ahead of New Year’s. Economic numbers continue to come in mixed, though, so that is why we might remain in a holding pattern until after the First of the New Year. The Fed question on rates has been resolved, and stocks held up well, so that is a plus heading into 2016.

For the year, the majors look pretty good given all of the challenges they faced this year. Year-to-date, the Dow is currently down 1.5%, the Nasdaq is up 6.5%, and the S&P 500 is pretty much flat for the year. The small-cap Russell 2000 is down about 4%, so while that index is lagging, it is holding up fairly well. Higher highs for the three majors might be tough unless the small caps hop on board, so we will be keeping a close watch on the Russell 2000 next week and into the New Year. Again, given all of the events of the year, especially the first interest rate hike in nine years, the numbers are quite respectable.

Oil and commodity prices will be the big focus in the New Year, and while the stock market is still way above the 2008-09 financial crisis lows, commodities, and oil are not. Commodity prices are nearly back down toward their post-crash lows. This raises the question of whether global GDP really IS slowing, which has some strategists worried. The divergence we have seen between falling commodity prices and a still-strong U.S. stock market is a possible “red flag,” so we will keep a close watch on the commodity plain next week and after the New Year.

On a holiday movie note, “The Big Short,” starring Steve Carell, Ryan Gosling and Brad Pitt came out on the 23rd, and it looks like a “must see” for any financial markets fan (or any subscriber of GorillaTrades). The movie tells the tale of the big crash in derivatives that fueled the housing boom leading up to the 2008-2009 meltdown in markets and the economy. It looks riveting and apparently does a great job at exposing a lot of the shenanigans that led to the biggest financial meltdown since the Great Depression. The takeaway from the movie was the amazing fact that NO ONE went to jail, and that the big banks that caused the debacle are not only alive and kicking today, but a whole lot bigger! The reviews are great, and the cast is superb, so enjoy if you are able to see it over the holidays.

That said, the Gorilla wishes each and all a Happy Holiday, Merry Christmas and a Happy New Year. Have a relaxing holiday season, and get ready for what will no doubt be an exciting 2016 for investors.

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