Mid-February Update: Volatility Expected to Persist
By: Christopher Mistal
February 16, 2016
Last Thursday, by six points, DJIA satisfied the freshly clarified Ned Davis Research bear market definition. From peak to trough DJIA was down greater than 13.0% after 145 calendar days. The very next day, last Friday, DJIA had its second best day of 2016, gaining 2%. S&P 500 was also up 2%. NASDAQ and the Russell 2000 also enjoyed solid moves higher, just not as strong. Bucking the longer-term track record of weakness before and after Presidents Day, DJIA, S&P 500, NASDAQ and Russell 2000 continued to rally today (even with oil declining). Unlike last Friday, the Russell 2000 and NASDAQ provided the leadership today. This is one small encouraging sign. However, a great deal of damage has been done on the charts.
[DJIA Daily Bar Chart] 
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
[Russell 2000 Daily Bar Chart]
This year’s market rout pulled S&P 500, NASDAQ and Russell 2000 below their respective lows from last August by meaningful amounts. DJIA violated its August closing low on just one day, last Thursday. And on that day, the major indices were all exhibiting signs of being oversold. Stochastic, relative strength and MACD indicators were all negative. Following two days of gains these indicators have improved, confirming the shift in momentum and there are now MACD and Stochastic buy signals across the board. Should the nascent rally persist, the first area of resistance is likely to be early February’s highs, right around the monthly pivot point (blue dashed line) in each chart above. Key levels to watch are around: DJIA 16440, S&P 500 1930, NASDAQ 4610 and Russell 2000 1040.
Only Two Losses Last 7 Months of Election Years
High levels of uncertainty and volatility have frayed many nerves already this year. Some indices and commodities are in bear markets, all of our January indicators were negative, the Fed has initiated the first rate tightening cycle in nearly a decade, global growth is tepid, and on and on. One possible bright spot is the last seven months of election years have historically been positive (see page 32 of Stock Trader’s Almanac 2016 for more).
In the above table 2016 has been added with the S&P 500’s performance through February 12. Like many recent election years, 2016 is off to a rough start. However, the only two losses in the last seven months of the last 16 election years were the direct result of bubbles bursting. In 2000, it was the tech bubble and in 2008 it was the credit bubble. A repeat of either of those years is not highly probable. Valuations are not as high now as they were in early 2000 and the financial industry is being watched much more closely now than back in 2007 and 2008.
Even though history does suggest some strength later this year, we do expect volatility to remain elevated. The Fed appears to be staying the course with rate hikes although, most likely at a slower pace. Oil still looks like it is trying to find support and stabilize. Today’s rather weak agreement among Saudi Arabia and Russia to cap production is a step along the path to stability, but a long way remains. Global growth and corporate earnings also appear fragile. Caution is still the prudent course as downside risk remains elevated and the likelihood of new highs in the near-term is low.