Levels to watch on the SPX, and why we're keeping an eye on small-caps and the RUT
"After the bulls won another battle at 2,000 last week, the SPX is now in the middle of its 2015 range, downgrading last week's favorable risk-reward to ‘neutral.’ Moreover, the SPX's 2014 close at 2,058.90 is back in play, so expect the bulls and bears to wage another battle this week to determine a green or red finish in 2015. For what it's worth, out of 248 trading days this year, the SPX has closed above its year-to-date breakeven level 159 times, or 64% of the days. This compares to the 89 days, or 36% of the time, the SPX has settled below its 2014 close. From this perspective, the probabilities slightly favor a ‘green’ finish to close out 2015."
-- Monday Morning Outlook, December 28, 2015
The bears immediately took some holiday cheer out of the equity market on Monday, with the S&P 500 Index (SPX - 2,043.94) being pushed back below its 2014 close at 2,058.90 to open the last trading week of the year. However, as we suspected, the bulls seized control early Tuesday, pushing the SPX back into the green and back to highs last seen in the middle of the month.
As you can see on the SPX’s December daily chart, the 2014 close was a battleground area for bulls and bears last month, perhaps a fitting end to a year that finished flat, with a lot of back-and-forth movement above and below the SPX's year-to-date (YTD) breakeven mark. We have certainly mentioned 2,058.90 a lot in 2015, so hopefully this coming year we won't have to sound like a broken record with respect to keying on 2015's close of 2,043.94. In fact, bulls and bears might both proclaim "good riddance" to 2015, in the hopes that 2016 brings with it a market that is more directional.
It appears on at least a couple of equity benchmarks, round-number areas will double up as YTD breakeven levels in 2016, given the Nasdaq Composite's (COMP) 2015 close at 5,007.41 and the S&P MidCap 400 Index's (MID) close at 1,398.58. As we flip the calendar to 2016, technicians will be keying on levels that proved important in 2015, specifically the SPX's May high-water mark close of 2,130 and the August correction low of 1,867.
The S&P's round 2,000 millennium mark could also be the focus of chart watchers, along with the overhead 2,120 area, as 80% of 2015's closes occurred between these two levels. While we've flipped the calendar year to 2016, 2015's range highs and lows have not gone away, and these are levels we'll have to contend with at some point in 2016 before a chart breakout or breakdown occurs.
Per the charts below, 2015 saw the shorts build positions on SPX and Nasdaq-100 Index (NDX) component stocks. Short interest rose 16% on SPX components, and a softer 5% on Nasdaq-100 components, as proxied by the PowerShares QQQ Trust (QQQ). For bulls, the prospect of a short-covering rally that pushes the SPX above its 2015 upper range is still alive as we enter 2016.
"Small Caps Forecast to Lead Amid Better Economy"
-- The Wall Street Journal, June 26, 2015
“Small Caps May Be Ready to Shine (For Real, This Time)"
-- The Wall Street Journal, December 30, 2015
The biggest area of concern heading into 2016 might be with respect to the underperforming small-cap stocks, as measured by the Russell 2000 Index (RUT - 1,135.89), which closed nearly 6% lower in 2015. This underperformance occurred amid short covering, as total short interest on RUT components declined by 3% last year. The underperformance also occurred within the context of predictions that this area of the market is on the verge of displaying market leadership.
Despite the calendar flipping to 2016 and a perceived "fresh start" for this group, we repeat a theme that we have been advising for weeks -- that being, if you are looking to reduce market exposure, do so in the small-cap names. Or, purchase puts on the iShares Russell 2000 ETF (IWM) as a hedge to your long exposure.
Turning to the more immediate term, 2016 looks like it will get off to a rough start -- following the lead of Chinese markets, which plunged today after dismal manufacturing data, and as investors anticipate that Chinese policymakers will lift a ban on share sales by major stakeholders at the end of this week. Trading was halted -- first for 15 minutes after a 5% decline, and again when the market was lower by 7% -- as the nation's new circuit breakers went into action on their first day.
S&P futures were indicated trading at around 2,000 in pre-market activity, which is roughly equivalent to the 200 level on the SPDR S&P 500 ETF Trust (SPY - 203.87). We mention this because there is decent put open interest at the 200 strike in January's standard expiration series, which expires in less than two weeks. Standard expiration is early this month, with the first of the month being a Friday. Bulls would like to see this round number hold like it did last month, but if bears retain control, the put-heavy 195 strike could very much be in play by the middle of the month. Moreover, the SPY would be vulnerable to filling an upside gap created on Monday, Oct. 5, when it opened at 196.46, following the previous Friday's pin at 195.00.
The way it looks pre-market, January 2016 could be a repeat of January 2015. The SPX began the year trading lower in 2015, supported by the round 2,000 area on multiple occasions during the months. Moreover, there were two rallies in January 2015 that were stopped cold at the site of its 2014 close. If indeed January 2016 looks like January 2015, expect a floor in the 2,000 area and resistance around 2,043-2,044.
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