Beginning of the End

This bull market is almost 7 years old.  It has confounded a lot of investors, with the massive divergence between the real economy and the markets.  We are at a point in the cycle where the upside is limited but the downside is huge.  But it's a what have you done for me lately market, so any sustained rallies next year will force fund managers to get into equities to keep up with the indexes even though they know its a horrible time for a long term investment.

That is where we are at now.  The driving force for a rally from these levels is stock buybacks, cash M&A, and a chase for performance to keep up with the S&P 500.  The first two are still going strong, it is the third thing that will be the ignition for an irrational rally to new all time highs.  Of course this is a speculation.  But with the way this year is ending, and with the Fed rate hike, the stage is set for underinvested fund managers to be forced to buy to keep up with the S&P, even though they aren't true believers.

There are two main scenarios that I envision can happen in the first quarter of 2016:

1) We get a sustained change in investor sentiment to bullishness as oil bottoms and rallies towards $50/barrel, and we hit new all time highs in the S&P 500 in the first quarter, and the Fed raises rates again in March.

2) We continue this trading range from around SPX 2000 to 2100 as sentiment remains the same, oil stays low, under $42/barrel, and Fed stays on the sidelines.

I am leaning towards the first scenario, although I cannot rule out a small chance of oil continuing to go lower and lower down to $30/barrel and staying there and causing massive pain in energy names leading to a retest of the August lows at SPX 1867.

As for the rest of this year, we could bounce a bit from this post Fed hike hangover, but it will very tough to get back above positive for the year above S&P 2058.