My very best wishes to all investors for a Happy, Safe and Prosperous New Year. Planning is essential for successful investing and the holidays give us time for reflection on the past and how to prepare for the future.
Investors’ 2016 Results Are Impressive
2016 was an incredible year for many investors. While the S&P gained a total of 200.63 points from Jan 4 to Dec 31 for a return of 9.8% in 2016, FullyInformed Members who have been emailing in their results for 2016, have shown some impressive gains from lows around 8% to as high as 67%. The average from all the members who have emailed in their results since the end of December is 24.5% which is a well beyond the goal of 12% for the year. Many members did extremely well during the summer months when the market was trending sideways, which made selling options, both puts and calls, very profitable. My congratulations to all investors!
S&P 500 In 2016
2016 was actually a fairly volatile year when we consider all the market actions which occurred in the year. The start of January saw the S&P open at 2038.20 but the mood was ugly following the first interest rate increase since the credit crisis stock market plunge. By mid-January the S&P index was down 11% and analysts were calling the bull market over and preparing investors for a new bear market that many pundits declared would be at 25% to 45%. A short rally in the second half of January ended with a drop back to the lows of 1810 by mid February. However once those lows held, investors snapped up stocks quickly and from mid February through to mid-April, investors pushed the S&P to 2100 for a 16% gain.
From mid-April to Mid-July the market churned sideways with a dip is late June that tested the 2000 level. That test ended with the S&P rushing higher to the 2180 level by mid-July. From there the S&P again moved sideways during the summer months and then by September it began to pullback. The pressure continued on stocks and by late October the market was slipping back to 2100.
Just prior to the election the market fell below 2100 but then the election of Donald Trump and the Republicans to both Houses saw a rally into the year-end that by December 31 resulted in a gain of 7.4%.
Through it all FullyInformed Members stayed invested and continued to trade with the market trend. The rally from February to mid-April was particularly profitable with numerous stock trades and some exceptional returns through the market direction portfolio. The summer period saw strong returns through selling options but not as many gains in the market direction portfolio. That changed though with the post-election rally which has seen significant returns from both stock trades, option selling and the market direction portfolio.
Fed Rate Increase
Throughout 2016 the Federal Reserve failed to raise rates despite continually warning that rate increases were coming. Finally in December the Fed raise rates for the second time in two years by a quarter of a percentage. However if economic statistics bear-out according to Federal Reserve Predictions, 2017 may see 3 more rate increases. Fed Chair Janet Yellen also indicated that more rate increases were expected in 2018 and 2019 as the Federal Reserve works toward normalizing interest rates and its balance sheet following the credit crisis period which saw the largest ballooning of the Fed’s balance sheet in history and interest rates also at historic lows.
The results of the Fed’s rate increase in December and the outlook for a rate increase possibly as early as March may keep investors on edge and could keep a lid on the market top at least short-term. We will certainly know shortly.
The New President
The rally in November following the election of Donald Trump and the Republicans is based on the outlook that the new President’s policies, changes to regulations, corporate tax decreases and infrastructure spending will increase profits and economic growth as well as return a degree of inflation. Whether this will happen is of course anyone’s guess, but staying protected with a few SPY Put options may be a strategy worthy of considering until a couple of quarters have passed and we begin to see some better signals on the economy and whether the President-elect Trump’s policies will be implemented and what their results will be.
Overall, making changes to an economy the size of the United States may not be an easy task but there were many economists who doubted President Ronald Reagan’s goals and objectives when he was elected. Indeed many Presidents have implemented changes that have had short-term as well as long-term impact on the economy so for now, judging President-elect Trump’s results are next to impossible to predict with any certainty.
Commodities are always difficult to predict and technical analysis of commodities is rarely accurate. Oil is a commodity that is driven by numerous factors from demand right to emotions. In 2015 Saudi Arabia had announced an end to any ceilings on oil supplies which by the end of 2015 had sent oil to $37.00.
This was an effort to force out shale oil producers in the United States. By January 2016 oil was trading at $36 and shale oil producers were being hit hard. One of the ETFs I trade is XOP which is the SPDR® S&P Oil & Gas Exploration & Production ETF. By mid-January it was trading for just above $22.00 and analysts felt oil was heading to below $30.00.
Instead oil began a recovery which by June saw the price back above $52.00. The XOP ETF was trading for $37.00 by June 8. A second pullback through into early August saw oil back below $44. At this point rumblings from OPEC were heard as OPEC members struggled to recover the price of oil through limiting production. Until early November the results were choppy at best but an agreement among OPEC and to an extent non-OPEC members to cap production sent the price of oil to a close above $53 by the end of 2016. Meanwhile XOP ended the year trading at $41.42 for a gain of 88% from the lows of January. Meanwhile oil prices had climbed 49% from the lows of January to the close on Dec 31.
The other oil stock I traded in 2016 was Exxon Mobil Stock which trades under the symbol XOM. Returns from trades done in Exxon Mobil Stock for 2016 were 62% which exceeded the gains in oil but could not beat the returns from the XOP ETF.
Gold and GLD ETF
Gold had a tumultuous year in 2016. It roared higher from January through to July and then lunged lower by the end of the year almost giving back all the gains for 2016 and ending the year up only slightly despite a spectacular climb to above $1350 in the summer. GLD which is the SPDR® Gold Shares ETF I trade against gold, followed the price of gold higher into July as it moved from $103.13 at the open of trading on Jan 4 to a high of $131.50 on July 6 for a gain of 27.5%. Since then GLD is down 16.6% into the close of trading on Dec 31.
While there are many reasons for the rallying and the decline, the rally was easy to trade through GLD and the decline was for the most part, in stages making trading the decline profitable as well. Overall though the outlook for gold remains mixed with many analysts bullish on gold and others bearish. If the economy does pick up steam and inflation does increase, gold should move higher. However if the US dollar climbs, gold may have a harder time rising. I have no outlook on gold but instead I prefer to trade the GLD ETF and for option trading, Barrick Gold Stock (ABX) is my favorite choice.
Transport Index 3 Year
Another interesting chart this year is the Dow Jones Transport Index. Looking back 3 years you can see that the decline in January 2016 bottomed the index following its decline which started in January 2015. The index broke through 6500 which was the lowest level since the fall of 2013. This was one of the primary reasons so many analysts were bearish in January and looking at the index’s decline from January 2015, there were good reasons many analysts worried that 2015 would be the final year of the stock bull market.
The transport index rallies from the lows of January to above 8000 but then in June the index dipped to a low of 7029 and many analysts held their breath, worried that it would break below 7000. Instead the index recovered and moved to 8000. The “Trump Rally” has pushed the index back to levels above 9000 which were last seen in late 2014 and early 2015.
This year it will be worthwhile following this index. Any decline below 8700 will see stocks pullback as well, in my opinion. I will be following the Dow Jones Transport Index weekly and posting analysis and outlook in The Week Ahead article for members.
Small Caps In 2016 – IWM ETF
Last year I wrote that if I had only one equity that I could trade, it would be the IWM ETF. This is the iShares Russell 2000 ETF which follows the Russell 2000 index of small cap stocks. Small caps have a history of volatility. Trading within separate small stock names can be like walking through a mine field. The IWM ETF on the other hand, smooth’s out those periods of stress and declines allowing for stellar returns with protection against loss of capital. While a small cap stock can double or triple it can also collapse and wipe out hard-earned capital. I prefer the stability of the IWM ETF. This year the ETF fell to a low of $93.65 on Feb 11. That was the worst pullback of the year and coincided with the pullback of the broader S&P and the NASDAQ and Dow Indexes. But the dip in June was smaller at just 8.7% and a second dip that started in September and ended in early November saw a drop of 8.6% but left the IWM ETF with still higher lows. Throughout 2016 the IWM ETF demonstrated solid technical readings which made trading within this index highly profitable. While the index gained an impressive 21.9% return from Jan 4 to December 31, trades done within IWM itself, returned 61% in 2016, almost three times the gain made by the ETF in 2016.
The small caps index has also been an excellent timing signal for knowing when to be cautious and when to risk more capital.
The IWM ETF will also be added to the weekly analysis and outlook for members this year.
While gains were impressive in 2016, 2017 offers a different trading field. There are as always, a lot of unknowns, but historically, 2017 may be a year to stay cautious.
The rally in bond markets that commenced back in the 1980 to 1982 period is ending, if not already ended. Commodity prices are still low by historic standards and inflation is only starting to be seen in the United States but remains widely subdued globally. Historically commodity prices are far below average for the past decade and as a group commodity indexes are trading at prices last seen in 1998.
History has also not been kind to post-election years which 2017 is. They have been among the worst of performers for stock markets. As well, the seventh year of decades tend to be among the worst of performers. This provides 2017 with a possible “double whammy”.
Santa Claus Rally?
We also have the Santa Claus rally to contend with. With just two more days left for this traditional rally to perform, it seems somewhat unlikely the Santa Claus Rally will occur this time around. Historically this has been a signal for a year that will see a major correction or the start of a bear market.
2017 – All About Strategies
Last year in my New Year’s post I discussed the importance of strategies in investing. This year I must stress the same message. Buying equities whether stocks or ETFS and hoping for stellar returns is difficult at the best of times, let along at a period when indexes are already at historic highs.
Instead by using strategies such as the Color Code System, the Weekly Wanderer Strategy, Hide and Seek Covered Calls, Home on The Range Strategy, The Shark Strategy, Cry Baby Strategy, Couch Potato Put Selling Strategy and numerous others, investors can build a level of protection into their portfolios that may be needed in 2017. Returns in 2016 were good for my portfolio but not as a result of simply buying a handful of stocks and hoping for the best. Instead it was through using strategies that are designed to protect my capital first and then provide a profit second. Through these strategies my portfolio grew again in 2016.
While the outlook for 2017 may not be as rosy as past years, no one can judge with any certainty what the year will bring. While history may point to 2017 as a potential down year, there are many other factors that we will not know for weeks to months that will also impact stocks.
I appreciate the support members have given to the FullyInformed website again this year. 2017 may be more difficult than 2016 but whatever the market throws at investors, there will be profitable opportunities. Remember to step back from the noise of the markets at times and instead focus on the goals of your portfolio. They should always include a percentage of cash held on the sidelines to take advantage of dips and pullbacks. The focus should also include protection of capital each time a trade is place and a rescue strategy that can be implemented if market conditions warrant it. Finally remember that investing should also be fun and enjoyable.
My very best wishes for a safe, prosperous and happy 2017. Glad to have you onboard for another year!