9 Market Themes To Watch Heading Into 2016

First of all, I want to say that the purpose of this post is not to make predictions about the future, so if you’re expecting a 12-month price target for the S&P 500, you’ll want to look elsewhere.

Throughout this exercise I used the weight of evidence present in markets around the globe in order to identify some market themes that I think will occur throughout 2016. Lastly, I want to say that none of these market themes are set in stone. As a market participant, I’m not here to be right/wrong, if/when the weight of evidence changes I’ll adjust.

Without further adieu, here are the nine market themes for 2016.
1. Developed > Emerging Markets

Since the SPDR S&P 500 ETF Trust SPY / iShares MSCI Emerging Markets Indx (ETF) EEM and Vanguard MSCI EAFE ETF VEA / Vanguard Emerging Markets Stock Index Fd VWO ratios bottomed in 2011, they’ve been on a complete tear, representing the broad outperformance of stocks in developed markets over emerging markets. These ratios developed multi-year bases and the breakouts from them were quite explosive. Despite their aggressive rallies, there is little evidence that suggests they’re ending anytime soon. There is evidence however, that their progress may be due for a bit of a pause in 2016.

The SPY / EEM ratio is approaching the 38.2% retracement of the 2000-2010 decline, which also corresponds with prior support near 6.7. In addition, momentum has negatively diverged at the recent highs, which has preceded pullbacks or consolidation periods in the past. Structurally this uptrend looks great, but we may see some consolidation this year before it breaks out to new highs.

Similar action is occuring in VEA / VWO as it approaches the highs it made in 2008. Despite the strong structural uptrend, momentum recently diverged as the ratio made new highs, suggesting a pause may be needed. Our structural target remains the 2008 highs, which also corresponds with the 161.8% extension of the 2014 correction. Despite this continued outperformance, I’d expect to see some consolidation in this ratio before it makes new highs.

2. Large-Caps To Outperform

Over the past decade or so, the ratio of large caps stocks to small caps stocks (SPY / iShares Russell 2000 Index (ETF) IWM, has been forming a major base and is starting to break out of it. If the ratio can clear 1.80, then 1.95 is the next big level of resistance. If this ratio can eventually get above 1.95 there is room for a lot of potential upside. I’m going to continue to watch this chart throughout the year as I think this may be the start of a much larger / longer-term trend. And this could be one of the major market themes for this year and perhaps years to come.

3. Commodities As a Group Will Continue To Slump

This doesn’t necessarily mean another big down year for the group, it could very well mean a flat year. Many of these markets in strong structural downtrends or trendless markets, meaning that time will be needed for them to reverse / sustainable uptrends to develop. That doesn’t mean that there won’t be counter-trend / mean reversion opportunities to take advantage of over the year, but it does mean that we shouldn’t be expecting strong multi-year downtrends to reverse themselves in a relatively short period. Time heals all wounds, even in markets, but we have to be patient to allow sustainable trend reversals to take place.

A good example of this is Crude Oil. Many commodity charts have been more or less crashing below downward sloping 200 day moving averages for years. Sure, some counter-trend opportunities presented themselves in 2015, but the structural trend is still in place and will take weeks / months / years for these trends to change.

One of the emerging market themes of 2015 and likely 2016? A change in year doesn’t do anything to change the fact that many of the Major U.S. Stock Market Indices and Sectors are riddled with flat 200 day moving averages. Until we see some consolidation in one direction or another to allow the slope of these moving averages to become decisively positive or negative, prices will likely stay stuck in a choppy range.

Micro-Caps, Small-Caps, and Mid-Caps, as well as the Transports and other important measures of risk appetite are trading below downward sloping 200 day moving averages, so that may indicate that the other indexes will follow their deteriorating breadth and resolve to the downside. We could also see sector rotation drive market breadth and the indices to new highs; nobody knows. Regardless of how these ranges resolve, the underlying catalyst is going to be time. Time is needed for the long term moving average to begin sloping in one direction or another to support a sustainable trend.

Now I know that everyone on the street has been expecting this to be one of the major market themes just about every year since the turn of the decade.. but I think market conditions are finally at a point that would support higher interest rates. Throughout 2015 we saw yields on the short end of the curve hit multi-year highs, but the long end of the curve was pretty much rangebound.

This action may have seemed lackluster on the surface, but the consolidation toward the top of its recent range allowed for both the 200 week and day moving averages to flatten out and begin rising, which could support higher prices. The other positive is that we’re retesting the downtrend line from the ’07 highs more and more frequently, and the more a level is tested, the higher likelihood it is to break. With momentum improving and the longer term moving averages sloping higher, prices may be able to stage a sustainable breakout, rather than a failed attempt like we’ve seen over the past few years. The prospect of this market theme playing out is worthy of keeping on your radar.

On a relative basis the Ten-Year Yield / S&P 500 ratio reached a structural downside target at the 261.8% extension of the ’10 – ’11 rally earlier in the year, and has since broken above the downtrend line from the 2013 highs, as well as the 2012 and 2013 lows.

6. Utilities Catch a Bid

After getting ahead of itself in early 2015, the Dow Jones Utility Average DJU spent the majority of the year consolidating above the uptrend line from the April 2009 lows, as well as the ’07 highs. This remains one of the few sectors above its primary uptrend line from the 2009 lows and momentum managed to stay in a bullish range throughout the duration of this correction.

Additionally, on a relative basis, DJU / SPX continues to hold above multi-year lows and remains above the downtrend line from 2011.
If price action can continue to improve on an absolute basis to allow the 200 day moving average to begin sloping higher, this market can go substantially higher in 2016. What would confirm this thesis is a breakout above resistance at 610, which would open the door to new all-time highs. And that makes the Utilities one of the more interesting market themes to watch in 2016.

Perhaps this is one of the market themes that that sounds a bit obscure, but it makes sense when looking around the world for relative strength leaders. Only 8 of the 43 Foreign Equity market ETFs I track were up on the year in 2015, with iShares MSCI Irld CP Invstb Mrkt Indx Fd EIRL leading the charge, gaining 21%.

Fortunately, much of those gains took place within the first half of the year, which allowed this market to consolidate near all-time highs before breaking out in the last two weeks of 2015. From a structural perspective the next price target is at the 161.8% extension of the 2014 decline, which represents 15% upside from current prices. The best part about this is the simplicity of the risk management in that we only want to be long this market above the top of the 2015 range at 41.

There are short-term concerns about a failed breakout on the daily chart given the momentum divergence and bullish consolidation pattern resolving to the downside, but from a structural perspective, I think it’s clear that the uptrend and relative strength in EIRL remains intact.

8. NZD/USD Will Have a Tough Year

As I reviewed all of the global markets I follow, I noticed that NZD/USD looks like one of the most well defined risk/reward setups in the world right now. Prices have been in a structural downtrend for 1 1/2 years now and recently mean reverted back toward the downtrend line from the 2014 highs. From a structural perspective, this looks like a perfect spot to get short versus.

On the daily chart it’s even more clear why this market is a fade, as prices run into a confluence of resistance at prior support, the downtrend line from the ’14 highs, and the downward sloping 200 day moving average. Combine that with a negative momentum divergence, and I think the weight of evidence clearly suggests fading this market aggressively.

9. The Grains (Wheat, Corn, Soybeans, and Oats) Due For More Downside

One common market theme across these ag commodities is that they all experienced some consolidation / mean reversion throughout 2015 to allow sentiment to reset, but now look like they’re ready to continue lower within their structural downtrends.

Oats failed to get back above broken support near 280 in the middle of 2015 and have been moving lower ever since. With momentum in a bearish range and prices below downward sloping 200 week and day moving averages, the bias remains to the downside. The next structural downside target lies at the 161.8% extension of the 2013-2014 rally, which corresponds nicely with prior support / resistance near 175-180.

Soybeans spent a good portion of 2015 trying to regain broken support and clear the downtrend line from the 2014 highs by getting above 925. Unfortunately, prices failed to do that and remain below downward sloping 200 week and day moving averages with momentum in a bearish range. As long as prices are below 925, they remain vulnerable and open to testing their next structural downside target near 665, which represents the 161.8% extension of the 2011-2012 rally, as well as prior support / resistance.

Wheat has tested the 460 level multiple times during 2015, with each successive rally being weaker and weaker. With prices below their downward sloping 200 week and day moving averages and, momentum in a bearish range, Wheat looks like it will test long term support / resistance in the low 400s at some point.

Corn experienced some mean reversion in mid-2015 after breaking above the downtrend line that’s been intact since 2013, but quickly stalled above prior support and put in a failed breakout in July. With prices below their downward sloping 200 week and day moving averages, and momentum in a bearish range, it looks like Corn will likely test long term support / resistance in the low 300s in 2016.

As I stated at the top of the post, I’m not in the prediction business. These are simply some of the market themes that I’ll be looking to take advantage of in 2016 should they play out as the weight of evidence suggests they might.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

This was originally shared on BruniCharting

The author does not have a position in any of mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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