Don’t Worry, Be Happy!

S&P500 daily

End of Day Update:

It’s been a volatile week as three strong up-days were followed by Thursday’s sharp decline that unwound all of Wednesday’s Fed pop. Volume has been consistently above average as plenty of traders are participating in this pre-year-end tug-of-war.

Between robust employment gains, rate hikes, falling oil, and a strong dollar, the market cannot decide on a direction. This leads to choppy trade where every apparent breakout/breakdown fizzles and reverses days later.

The biggest driver of recent weakness is plunging oil prices that cannot find a bottom. Fears of a decimated energy sector and the resulting bond defaults are making equity traders nervous. But as spooky as the headlines feel, the stock market is far less bothered by these developments than the analysts and talking heads. While oil has been cut in half from its 52-week high, the S&P500 is down a far more palatable 4%. Even though it feels like we are in the middle of a protracted bear market, the actual evidence is far less convincing.

This year we endured a near Grexit, Russian aggression, multiple acts of terrorism, Chinese stock market crash, global slowing, plunging oil, and a surging dollar. Looking only at the headlines, it’s been a horrible year. But somehow the equity market is down a modest 4% from all-time highs. Hardly the doom-and-gloom that most traders feel. Bears have been calling for a major selloff all year, but with only a couple of weeks left in 2015, they are starting to look more like Chicken Littles than insightful and savvy speculators.

The biggest thing working against bears at this point is everyone is well aware of their investment thesis. That means anyone who agrees with them has been given plenty of time to sell and as a result, the current crop of owners are not bothered by these prognostications of doom-and-gloom. No matter what the market is “supposed to do”, when no one sells the news, it is really hard to trigger a major selloff. In fact as a contrarian I take the opposite view. If these dire headlines cannot dent this market, just imagine what will happen when it actually stumbles across the inevitable piece of good news? Disagree with this market at your peril.

Jani