This is how the stock market works:
“Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10, and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further, and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him. In the absence of the man, the assistant told the villagers, ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.’ The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.”
. . . Author unknown
Well, according to the Chinese calendar, 2016 is the year of the monkey, the red monkey to be exact. The Chinese day of the Red Monkey begins on February 8, Chinese New Year’s Day. To quote “The Chinese Fortune Calendar:”
“According to Chinese Five Elements Horoscopes, Monkey contains Metal and Water. Metal is connected to gold. Water is connected to wisdom and danger. Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good return for your money investment, then you need to outsmart the Monkey. Metal is also connected to the Wind. That implies the status of events will be changing very quickly. Think twice before you leap when making changes for your finance, career, business relationship and people relationship.”
“Get the monkey off of my back” was the cry from money managers at the end of 2015, as most of them underperformed the indices. That’s a pretty unbelievable factoid given the S&P 500 was down a mere 0.73%. I guess if you were a “momentum monkey,” owning just the FANGs (Facebook, Amazon, Netflix, Google), you had a fairly good year. As Goldman Sachs notes, “FANGs comprise 20% of the Nasdaq 100 and 5.5% of the S&P 500 [and they] contributed +3.5% of performance to S&P’s performance (or lack thereof) this year.” Goldman goes on to write, “Six of the top 10 best performing stocks in the S&P 500 are TMT stocks (Telecommunication, Media, Technology). There is only one TMT stock in the bottom 10 S&P performers on the year (Micron).”
To be sure, it has been a very frustrating year for most, but keep the faith, because typically following a flat year (no more than +/- 5%), the next year has been a good one for stocks. Since 1980, such “flat years” have occurred seven times, and in six of those seven times, the S&P 500 was higher the following year 86% of the time with the exception being 2008. While on CNBC last week, debating with a negative nabob who was discussing the internal deterioration of stocks, I said that I agree. However, in rotating the prism 180%, one can make the case that, with 47% of Lowry’s Operating Companies Only (OCO) universe of stocks down 20% (or more) from their respective 52-week highs (read: internal deterioration), there is an argument to be made that many stocks have already been through a bear market. So while the bears look at a long-term chart of the SPX and see a “broadening top” (chart 1), the bulls look at the same chart and see a yearlong consolidation following an over 200% rally (chart 2).