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Stock Market Bottoming Out or the Last Bull Standing?

Stock-Markets / Stock Markets 2016 Jan 25, 2016 - 08:19 AM GMT

By: Nadeem_Walayat


The stock market has rallied to back over 16k on Friday, closing at 16,093, up 210 points on the day, which apparently according to the bear market doom and gloom growing consensus must be the first bear market counter-trend rally of 2016. Whilst my consistent view to the continence of many has been that the stock market is undergoing an extreme correction which this interim analysis seeks to evaluate ahead of my in-depth analysis and detailed trend forecast for probably the whole of the remainder of 2016.

The stock market has bounced, does this mean that the bottom is in or is there further lower to go?

The Last Bull Standing?

Given the barrage of bearish emails and comments on our youtube channel, it can be tough to continue to sustain consistency of expectations to instead succumb to the flip flop mentality on every dip or rally, especially when literally everyone is SCREAMING BEAR into my ear hole!

Here's a taste of just the recent youtube comments -

Nadeem at what point do you concede you are dead wrong and this is a bear market only going lower?

>>> When I've done my analysis which will tell me what it is and not a day sooner !

Another turns bearish. xxxxx Your the last I follow that is still in the Bull camp... all have road the Bull 6 years... waiting for you to confirm.

>>> LOL, yeh, maybe my next stocks video will start off with last post bugal call.

Hi Nadeem, I've been following your analysis for the last six years and you've never been wrong! After last Fridays action, do you still think that Dow 15500 will hold? Regards, Sam

>>> Hi I'm undertaking a series of inter-markets in-depth analysis that I will convert into videos. My view is that this is a severe correction in a 7 year long bull market, probably a necessary correction for the next LEG UP! So the next few weeks could deliver a mega buying opportunity. Though again note this is AHEAD of my series of in-depth analysis of which next is on crude oil.

Nadeem, my man how is it you missed this bear market so badly when everyone and their grandmother could see it coming as early as summer?

Nadeem be a man and admit you were wrong. Market only going lower.

Hey Nadeem my man, how are you enjoying the bear market that you were blind to?

We'll firstly I don't tend to pull my forecasts out of thin air, instead I follow a time tested laborious process of IN-DEPTH analysis that reveals pieces of the puzzle, of which my most recent in-depth analysis was of the crude oil price. Whilst I could just forget the inter-market relationships and just jump straight to analysis of the stock market, as that is which most apparently want to hear the direction of. However, I KNOW to arrive at that which is the most probable then I REALLY do need to do the HARD WORK of letting the trend reveal itself.

In which respect my recent in-depth analysis concluded in a detailed trend forecast for the crude oil price as covered in this comprehensive 38minute video:

My forecast conclusions were for the oil price bear market to have made it's final bottom BY early February 2016 and embark on a bull market that would target a a trend towards a late year high of $60 as excerpted below :

17 Jan 2016 - Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016

Crude Oil Price 2016 Forecast Conclusion

My forecast conclusion is for the crude oil price to trade within three distinct trading ranges for 2016 of $20 to $40, $35 to $50 and $62 to $40. Furthermore the trend pattern imposed onto the trading ranges implies that a bottom is likely by early February 2016 at around $25, followed by a trend higher into Mid year towards $50, a correction into September, followed by a trend towards $62 before succumbing to a correction during December to target an end year price of approx $48 as illustrated by the following forecast graph.

The bottom line is that the current the oil price collapse is a wake up call to all major oil producers that crude oil as an energy source is running out of time. So whilst there may be future oil price spikes, however the long-term trend, given the likes of climate change is for the oil age to go the way of previous ages such as the Stone Age and Bronze age and so it will be for the oil age. Which means nations such as Saudi Arabia, regardless of price understand they need to get as much of their oil out of the ground as possible and sold off before they run out of customers!

Crude Oil Implications for the Stock Market

Having a forecast conclusion for the oil price for 2016 allows me to quickly gauge what this means in terms of any correlation between oil and stock price trends, i.e. when the oil price rises do stocks tend to rise or not, or is the relationship more inverse, i.e. a falling oil price is definitely a net economic boom for most major western economies given the fact that their level of oil consumption tends to be is far greater than production and thus a falling oil price acts to cut import bills and boost consumer spending as the cost of travel falls resulting in more cash in the pocket for ordinary consumers. Against this we have the negative impact of oil sector companies in distress that ripples out to other sectors that acts to destabilise the financial markets i.e. precisely which we have been witnessing so far this year.

Firstly, what stands out is that there is a strong correlation in swing between the oil price and the stock market but not in trend i.e. if the oil price is swinging lower then the stock market usually also soon starts to swing lower, as the oil price tends to lead the stock market swings. Also it's not a case of if the oil price falls today then the stock market will also fall as same day direction only tends to occur about 50% of the time. Conversely when the oil price is swinging higher then the stock market will tend to swing higher. Of course this is not a iron caste 100% rule for at the end of the day it is just one supplementary inter-market indicator.

The goldilocks oil price range for stocks appears to be between about $112 and $75, a range that we are unlikely to see a return to any time soon, i.e. for the whole of 2016, so implies relative weakness for stocks.

Secondly, a falling oil price is a net positive for the general stock market upto a point and that point appears to be around $40, below which stock market investors appear to lose some touch with reality and perceive the drop below $40 as the harbinger of economic and thus stock market catastrophe, which actually does have some fundamental basis i.e. loss of demand due to loss of economic activity and implications for the heavily in-debted energy sector pulling the general stock market indices lower.

So where the stock market is concerned $40 appears to be the KEY level, below which we see what we have been witnessing in terms of trend weakness, whereas the closer the oil price gets to attaining $40 the more calm we are likely to witness and strengthening trend. Which given my forecast for an oil price low by early Feb 2016, implies that we are now within a 2-3 week window for the stock market to bottom out. So whilst we are probably in for bumpy ride over the next few weeks, however, according to the oil price swing correlation it's not all doom and gloom once the oil price starts to gravitate towards $40, which given the last price of $32, may not be that far off.

Conversely, one needs to watch for deviation from the oil price trend forecast as a harbinger for stock market strength or weakness going forward i.e. $20, or even $10 is going to result in very bloody stock market chart. So do bear that in mind as some need to be reminded that the trend forecasts are the conclusions of what I deem to be the most probable following in-depth analysis and not some prophetic utterances from a man-god deity.

Stock Market Quick Technical Take

What jumps out form the stock chart is that the recent bounce was off the August low, can it hold ? We'll the decline into the low was pretty severe which technically means it's unlikely to hold which means that the stock market is in a larger corrective pattern that began of the May 2015 high, which is a pretty lengthy corrective pattern in terms of time i.e. from May to probably February, which has acted to unwind much bullish sentiment to the point where even many of the former bulls are now fully fledged bears, probably reaching their most vocal just as the stock market puts in its bottom.

MACD - Additionally the MACD is in the process of bottoming out from an extreme low which also confirms that further downside is very limited.

The bottom line is that the oil price trend and the stock markets oversold state are converging towards a stock market bottom that should carve out a final bottom for 2016 in a time window that probably runs for another 2-3 weeks. So whilst it is probably not going look pretty i.e. the last low of 15,500 looks likely to break, however given the oil price trend forecast then it should form the end of this stock market correction and herald the resumption of the stocks bull market.

Again, this is an interim analysis in response to reader requests for an update in advance of my in-depth analysis that seeks to conclude in a detailed trend forecast for the whole of 2016, so ensure you are subscribed to my always free newsletter (only requirement is an email address) for future updates and the following forthcoming pieces of in-depth analysis

  • Interest Rates 2016
  • US Dollar Trend Forecast
  • Stock Market Trend Forecast 2016
  • US House Prices Forecast 2016 and Beyond
  • Gold and Silver Price Forecast 2016

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2016 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


26 Jan 16, 00:02
Stimulating reading

Stimulating reading. Your thoughts are very logical.

Oil is weak and going to $25.

Gold is weak.

Dollar is weak unable to move up despite all the negativity.

I tend to think that the stocks will go down since there is a ton of supply on top. Things need to get more negative for investors and all the supply to sell and to throw the towel. Then, the maket can rise again.

Would you share your entry and exit strategies? Do you buy on pullbacks, breakouts, a new higher highs , oversold levels, at support?


01 Feb 16, 04:01

People are overly positive about the stock market, all thinking they are going to be saved by the Fed and central banks.

It is hard for the stock market to rise when the high yield bonds are falling and money goes into government bonds...

Let's not forget there is a lot of uncertainty with the presidential elections as well.

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