December's action and iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL)
Past December's cannot be used to absolutely define the current market we are in today, but they held, so as a result the strategies that I am offering to clients are proactive, they involve high degrees of cost basis improvement and we implement cost basis improvement techniques in the accounts I manage too, but the accurate full disclosure is that my underlying bias is to expect the market to rally from these lows through the end of the year.
That disclosure does not satisfy the purpose of this article, but it is important to understand. The purpose of this article is instead to rationalize the aggressive declines we have seen in December so far. Of course, anyone paying even a lick of attention is going to point to two catalysts. First, the declining price of iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL) is playing a major role, and the active selling that is taking place in iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) is as well. One clearly piggybacks on the other, as high yield bonds are weak as a result of weak oil prices, but even more interesting catalysts are at play.
First of all, and this is not quantifiable using any public data, it seems as if hedge funds, especially those that were lagging the market, took a potshot at the short side of the oil market when Opec decided not to cut production. They successfully started a snowball and in large part that catalyst is playing a role in the decline of oil prices. The media is going to debate supply and demand, and absolutely that should play a role, but that influence is consumer-market based, and would not have had the impact it has had in year's past. Instead, it is the futures market for oil that has been driven down so fast by these institutions, and to their credit that has been an exceptional trade. They saw the opportunity to manipulate that market and they took it.
I think that's a great job by them, and that leads to the point of this article.
In years past institutional investors were very reluctant to try to manipulate a market like we're doing now in Oil because there was a constant flow of added liquidity being injected into the system by the Federal Reserve every month. Now, the constant flow of liquidity is no longer there, the monthly stimulus program is over, and that opens the door for extreme levels of market volatility from time to time. In fact, it is our observation that 2015 will be a year of dramatic swings and excessive volatility and it is absolutely because the constant flow of stimulus that stabilized the market in years past is no longer there and institutional investors who find opportunity to manipulate markets from time to time will absolutely take the when they can.
What we have seen thus far in December is a precursor to what we will see next year and that is absolutely the most important takeaway you can have from what has taken place so far. Yes, I expect the market to increase to the end of the year, based on what I know about December's, but we're absolutely proactive and our strategies are designed to control risk and reduce cost basis when needed.
Anyone who was expecting a sanguine market environment like they have seen in years past needs to rethink their expectation for 2015 and should consider the markets action in December as the leading indicator of what next year will be like. We are not in Kansas anymore and the FOMC is not there to hold your hand and make everything feel warm and fuzzy when the going gets tough.