Stock Market: Going Into The Last Week Of 2016

The SP 500 added 0.30% this week, which pushes the YTD return up to 13.09%. The year low was set on the 11th of February at -10.5%.

SPY data by YCharts

The main driver of this year’s performance has been the stronger growth outlook in the second half of this year. The ISM manufacturing index increased and pushed stocks higher.

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I always look at the ISM index to see how the economy is expected to perform over the next 1-3 months. This is because the ISM index has the ability to predict both the economy and the stock market.

Extra: If you want to know more about economic indicators, feel free to read my blog about this topic.

I used the current SP 500 value to see how the year-on-year performance of the next few weeks would be if the stock market didn’t change at all. I do this to see how much future growth is priced in. It is a quite unique approach, but it has worked extremely well for me. At this point, it looks like moderate growth is priced in. Higher growth still has the ability to push stocks up 100-200 point in the first half year of 2017.

The Q4/2016 rally has been supported by very cyclical assets like the VanEck Vectors Steel ETF SLX, the SPDR SP Bank ETF KBE and the iShares U.S. Aerospace Defense ETF ITA. All of these industries/sectors are favorable if the new president keeps his promises of lower taxes, higher military spending and protection of the domestic steel industry.

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My favorite sentiment indicator has declined a bit. I always look at the ratio spread between transportation stocks and utility stocks. This ratio displays the willingness to take risk. The ratio has supported the entire rally since November and higher growth since September.

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The ratio spread between high yield bonds and government bonds shows the same pattern. An uptrend since July with a clear acceleration since October.

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The graph below shows the capital expenditures average of three out of five major regional FED districts. I excluded Richmond and Dallas because they have not published their December numbers yet. Capital expenditures are through the roof. Manufacturing is gearing up to start with a very solid new year. I will use this graph in combination with a few other leading indicators to analyze a few interesting stock picks for the new year in my next article.

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It is graphs like the one above that support higher growth. This in combination with strong sentiment indicators provided a good environment to be net long in this market. I am around 50% net long currently and I am not planning to decrease this ratio over the next few months. I will write a few additional articles over the next two weeks to elaborate on chances in this environment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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