I really hate the new year. It's the one time of the year where everyone is excited for nothing. The day where pundits get more insane, people really believe they'll change over night, and tension to have an epic night are higher than a Klan rally in a south Chicago ghetto. I typically hate hearing people's predictions in general for the same reason I hate twitter; as Lewis Black puts it, "Where do you get the massive ego that anybody actually gives a shit".
As a trader, the new year especially sucks. Everyone feels like they need to give you some bullshit arbitrary "fact" and toot their own horn. I hate to pick on Jim Cramer (frankly it's just too easy these days) but I recently read his outlook for 2015. Long story short he suggested that 2015 would be the best year to own stocks. I parsed through his predictions of Dow stock performances in 2015 as well. Here's what we found. You can compare these with the actual results here.
The point here isn't that he was wrong. In fact in some cases he was accurate (DIS +13% is pretty spot on), the issue is the same one that most pundits face; they have a hard time separating what happened recently from what they expect to happen moving forward. A classic example of this from the mouth of Jim Cramer came just six days into the new year where he suggested that oil, which had been halved in a short period of time may have bottomed.
It's incredibly important to remember that many fund managers are Beta traders. A Beta trader is someone who by definition does well when the market does well and does poorly when the market doesn't do as well. As you've noticed this year has been tough for many of the most popular and notable fund managers out there. Guys like Ackman, Einhorn, Icahn and many others have struggled and are underperforming the markets.
YOU'RE going to hear a lot of predictions in the next few days and weeks. You're also going to hear a lot of bogus statistics. Correlations that make dude's sweating in suits look like what they know what they're talking about. One example of this is that is popular amongst the talking heads right now is that when high yield bond markets fall during a given year, 80% of the time the markets are up (significantly) the following year. This will be the bull thesis moving forward for many of these "pundits" that require having an audience to actually maintain an income (They more than likely couldn't survive on their trading alone). So this reactionary tailwind will continue until it doesn't, and when it doesn't that's when it's your time to get in.
⚡️☝⚡️☝What does this mean? ☝⚡️☝⚡️
In November of 2014, I told @slavavancouver my bias that the oil markets are going to implode in the next year as Saudi Arabia floods the markets with oil to destroy the fracking companies and competition. I outlined for her, and others, my thesis that as more and more oil comes online and demand remains consistent oil will continue to fall precipitously as many oil companies are/were heavily leveraged with debt.
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I'm not trying to pound my chest here or give the whole "I told you so" bullshit. I am however absolutely certain that I did not hear that narrative from any major financial syndicate until fall 2015. So what I'm saying above is that you're going to hear a lot of reactionary nonsense about how people now know what the hell they're talking about with markets and with the fall of oil. You're going to hear a lot of differing opinions and a dialogue tug of war about the oil markets. Here's the reality.
There are a lot of companies that have a lot of debt. I'm talking a mountain of fucking debt. These same companies are going to get obliterated. The big ones are going to take on more debt to keep operations going business as usual for shareholders and so they can offer pennies on the dollar to buy out the smaller destroyed companies and claim their assets. A fucking land-grab of assets. One problem -- everyone's ready to call a bottom. That makes me believe that we're going a lot lower in oil. The bias is that $20 oil is low and we "can" reach that. Well what if we blow through that? What happens then? What happens for the huge companies that think they can keep it together? I'm not predicting that we do get there, but I've been doing this for 10 years now and markets rarely give investors time to get out, or get in. This is a disaster extreme case scenario and though I'm not calling for it. But I'm also not ruling it out. Ignore the guys and girls too smart for their own good on TV. Don't attempt to find a bottom. CASH IS A POSITION.
UNDER THE HOOD
THERE is no reason why the current bias (lower) should change at all. Hope is not a merit by which traders can profit consistently. That said, sit on your ass, ignore the bullish rhetoric and wait. Be selective, be skeptical, and be patient. The markets rarely give individuals an opportunity to get in or out. We've been hanging around 2100 for a very long time now, the bias is if we were going to breakout, we would have done so. With market breadth weakening "under the hood," it's only a matter of time before investors start to sell the winners (NFLX AMZN GOOGL PCLN FB). It's also unlikely that this "dash for trash" continues into the new year as there is no catalyst currently to help the dip buyers that existed at the end of 2015.
TROUBLE IN PARADISE
I like to use relationships as a metaphor when explaining the stock market to those who don't know much about it. In this case, the market provides a very good metaphor. The more you hear someone attempt to convince you (and themselves) that their relationship is in good standing, the less likely that is the case. The more a couple has to have talks about how to make things work, the less likely things will actually work. Keep that in mind when you hear pundit after pundit give you bogus stat after bogus stat on why the market should go higher in 2016.
I am not advocating that a year from now we won't be higher, I am simply advocating that there is currently no reason for us to go higher. I am an advocate of waiting for a flush of some kind and a floor before looking to get aggressively long.
My sentiment in 2016 is simple. Oil is fucked until it's not, stocks are struggling to find leadership, breadth is weak under the hood, bifurcation will only get worse, pundits will stay behind the curve, cash is still a position, leaders will lead both upwards and then back down, and finally no need to be a hero. As always, do your own homework and ignore the noise you see on the tube. Their performance is not much better than the average joe.
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