INSIGHTS

On December 21, 2015

AAM Viewpoints - Irresolute Market Trend Could Be Precursor for Upbeat 2016

The trading range bound market environment through much of November extending into December has been characterized by rapid sector rotation and a moderately contracting base of individual stock leaders. My summary observations during this period do not alter my longer-term bullish outlook. The trading range pattern seems to have served as an intermediate consolidation process that has addressed near-term price and sentiment excesses generated by a 2,000-point DJIA (Dow Jones Industrial Average) rally between October 2 and November 3. The inconsistent performances among the core leadership categories are attributable to seasonal and cyclical factors as well as to a steady onslaught of headline news challenges. Following the August 24 stock market rout, the DJIA and other indices briefly reclaimed the trading channel established earlier this year. Technical jargon would reference this resulting DJIA pattern as a “reverse head and shoulders” that in practical terms arrested a 10% correction, forged support at incrementally higher levels (now above 17,000) and faced off with key resistance in proximity to 18,000.

Can the DJIA eventually scale resistance and break out into the clear above 18,400? I believe the answer is “yes” based on underlying market trends. The investment environment is changing. It has become a market of stocks as recent quarterly earnings outcomes have honed the winners’ circle of leaders. Growth holds a massive lead over value with Russell 3000 Growth (RAG) outpacing Russell 3000 Value (RAV) by 1,062 basis points as of December 8. This margin actually widened after August 24. Investors continue to exhibit a greater willingness to accept more risk for more reward. This shift in investor psychology has not altered the market’s core leadership. Instead, it is clarifying and enhancing the driving components representing these sectors. Following an irresolute year, the outlook favors higher levels in 2016. I believe 19,000 will be attained in the first quarter of 2016.

There is a balanced representation of large, medium and small-cap stocks among the leading sectors. This is a favorable internal characteristic that underscores good technical structure as well as minimal speculation. It has been a challenging year with flat line performances among the major market indices. But, I believe a formidable foundation has been constructed in 2015 that could promote higher stock levels next year. I do not anticipate substantial changes in industry leadership. I continue to favor aerospace/defense, consumer discretionary, consumer staples, health care, industrials and technology. Financials have yet to be acquitted as primary leaders with their erratic performances but the group seems to be staging a comeback with gradually improving relative strength.

Falling prices in West Texas Intermediate Crude Oil (WTI) present obvious headwinds for energy stocks, but select oil and gas explorers, integrated oils and oil service stocks are exhibiting more constructive behavior. While cascading crude oil prices have presented a drag on equities, I am moderately bullish on the outlook for oil next year. The most recent selloff below $35 may be a harbinger of an approaching pivot bottom in WTI.

CRN:  2015-1208-5074R

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