Outlook for the rest of 2015
If this were not the 3rd year of the election cycle I would have a different opinion, but it is hard to fight what thus far has been absolute truth. The Market has not been down in a pre-election year since 1939 and it has never been down in a 7th year of a Presidential Term. In addition, the last decline, in 1939, was not material, only 2.9%.
However, as I typed these words the DJIA was down almost 1% YTD, the S&P was barely hanging on at +0.45%, but the more volatile markets were up. The Russell 2000 was up over 3% and the NASDAQ was strongest with gains of over 5%. All of the markets were off of their YTD and all times highs.
So what do I think is going to happen for the rest of this year?
Let's start by reviewing a report that I issued to clients about a month ago that discussed the level of margin debt out there today. This is a popular topic because margin debt levels are at an all time high, but that does not paint the entire picture. Liquidity levels were very high in the past thanks to FOMC stimulus, so it is not a surprise that margin debt levels were also at a nominal all time high, and more work needed to be done to make this a relevant observation.
The work I conducted aimed to better quantify that generalization, and to do that I compared CASH - to - Margin Debt. What I found is that the levels of cash investors had when compared to the level of margin debt that they carried was at an all time low, and this was much more important. In essence, investors have (or at least had when I issued the report) less of an ability to buy stocks (lower cash - margin means lower liquidity) than they have ever had before.
Anyone can see that this observation paves the way for suggesting that the market decline furiously, and if you read me regularly you know that I could bring in my longer term macroeconomic work to support the thesis that naturalized demand trends are much different than what seems to exist today, and that is a monkey on the back of this picture I am painting, but I am not going there.
Instead, I am going back to the realization that this year in an election cycle has historically been the strongest, and I am going to respect that as I analyze the rest of the year.
The technical chart patterns I am watching, the CASH - Margin Debt analysis I referenced, the valuation levels of the market, the macroeconomic work I provide, and a new report I am preparing about the recent actions of the smaller investor all suggest lower levels, and we absolutely may get them soon, but the market may not end the year on the mat. I expect it to get up and fight again after it falls.
I issued a report in May that said 'sell in July would be better than sell in May and go away' and 2 weeks ago I told clients that we were close enough to July, so I also recommended 2x short ETFs on the market and we are holding them for a hedge and a trade. Those are ProShares UltraShort S&P500 (ETF) (NYSEARCA:SDS), ProShares UltraShort QQQ (ETF) (NYSEARCA:QID), ProShares UltraShort Russell2000 (ETF) (NYSEARCA:TWM), and ProShares UltraShort Dow30 (ETF) (NYSEARCA:DXD), but I do not think we will plug our noses this year. My anticipation is that we will secure gains from them within the next month or so, actions that will be dictated by the market's prices as always, and then we very well may get net long again given what we know about presidential terms.
Ultimately, everything points down except that, and although the scales may seem to be tilted down it certainly can be argued that the weight that the Presidential Term carries is enough to allow the market to end the year at least close to breakeven. After that the bottom can be ripped out of this market...