Stocks Back To Break-Even For The Year

Stocks rallied sharply last week, led by beaten down areas (energy, materials, transports, etc) that bounced from deeply oversold levels. Not much changed last week as the same underlying conditions, we have outlined for you in recent months, continue to exist beneath the surface. The S&P 500 is back to breakeven for 2015 and the best trade of the year has been a counter-trend mean-reversion trade. Meaning, short the index when it is in positive territory and buy it when it dips into negative territory. This year has been an anomaly because most years we see the market trend (either up or down), rarely does it finish flat the year. The last time it was flat for the year was 2011 and that led to a strong rally 2013-2015. The big difference was that in 2011, the bull market was only two years old and it is turning 7 in March 2016. Clearly, we are very late in the game. That doesn’t mean the bull market has to end, just that odds favor we are getting closer to the inevitable end. The bullish argument is twofold: 1. Bull markets rarely end when the P/E ratio is 19 for the S&P 500 (the last few bull markets ended when the P/E ratio was in the 20’s) and 2. We have never seen a bull market end with the Fed keeping rates at 0.25%. That doesn’t mean the bull market can’t end now – just that we haven’t seen it happen before. On the other hand, the bears argue that the bull market is nearly 7 years old and the market is forming a large topping pattern as leadership dries up. Both factors are classic signs of late-stage toppy action. What does all this mean for us? We remain flexible and will be prepared for either scenario to unfold. If the major indices breakout of their year-long trading ranges (S&P 500 2,134) then odds favor we head higher. Conversely, if we break down below Aug’s low (1867), odds favor we head lower. Until then, we have to expect this choppy action to continue.
Monday-Thursday’s Action: Stocks Bounce From Deeply Oversold Levels