Wednesday, December 31, 2014

2015: A Year of Transition

The market is delivering a surprising back to back selloff to end the year, and the VIX is trading at 17.5.  This is quite a resilient VIX index despite sitting just 1% below all time highs on SPX.  This market is resembling the late stage of a bull market that is transitioning to a bear market.  This transition is usually marked by higher volatility along with all time highs.  This happened in 2000 and 2007.

Despite this, the market shook out quite a few bulls on that December dip, and based on the V bottom template, January should be a strong month for stocks, or at least pullback proof for the first half of the month.  In the late stages of a bull market, you have a VIX that trades more often above 15 than below 15.  Also, you get drops out of the blue without warning, like we had in December and even October, which didn't give warning signs such as increasing volatility ahead of the fall.

It is going to be a treacherous market, a market where you will have to be positioned short or in cash before there is any warning of a drop.

Crude oil looks like it is near a bottom here, and with seasonality getting much more positive as February and March arrive, the start of the refiners pumping out gasoline for the driving season.

Overall, expecting a stronger 1st half of the year, with increasing volatility as the valuations are overvalued and we are nearing saturation in equity ownership.  This should lead to a transition during the middle of the year, just as the Fed prepares for rate hikes, and the market will likely be weak and dare the Fed to hike rates in the face of stock market weakness.  And once again, I predict that the Fed will placate the market and not hike rates next year.  We'll see.  Forecasts are often wrong, I will take advantage of opportunities as they arrive, and not force the issue like I did sometimes this year.

Happy New Year, and hoping for a whopper in 2015.

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