End of Day Analysis:
Santa was a little late this year, but better late than never. Tuesday the S&P500 finally reclaimed both the 50 and 200 day moving averages and is only three-percent from all-time highs. While it isn’t appropriate to draw long-term conclusions from this week’s light holiday trade, it is encouraging to see the path of least resistance is higher despite the relentless onslaught of ominous headlines. In a year where we’ve been given every excuse to sell off, this market has stubbornly hung in there.
Since this will be my last post of 2015, I will share the 2016 outlook I wrote for Investing.com.
What does 2016 hold for us? The best place to start looking for answers is in our past. Over the last 50-years the S&P 500 finished higher 78% of the time with a median gain of 18%. But what about those pesky off-years? The remaining 22% of the time we finished in the red, but with a more modest 10% median loss. These phenomenally favorable odds explain why the S&P 500 is up a staggering 10,800% over the last 50-years. Without anything else to go on, clearly the smart move is sticking with the market.
But everyone wants to know if 2016 will be a typical year. Even though the S&P 500 is within a few percent of all-time highs, bearishness remains unusually elevated in most sentiment surveys. It seems the crowd is far more concerned about this six-year-old bull market than excited to embrace it. And who can blame them? Looking at the last 12-months of headlines, it is far easier to recall bearish stories because there were so many of them.
But as a contrarian, the crowd’s cynical outlook is constructive because it means a lot of negative sentiment is already priced in. I fear markets that stop going up on good news, not ones that fail to sell off on bad news. Inevitably the news cycle will shift and we will stumble into a wave of positive headlines. The S&P 500 that struggled to move beyond 2,100 throughout 2015 will explode higher when these cynics are transformed into believers.
While it is impossible to predict the surprises we will encounter over the next 366 days, given this sentiment skew and the fact we ran out of owners willing to sell bad news, the odds of a good year for US markets are even more favorable than the historical averages suggest.
Happy New Year!
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