Market Lab Report - Premarket Pulse 1/4/16

Published : January 4 2016 at 9:21 ET

Brief update on VIX Volatility Model: The beta phase of the model has gone through various revisions with regards to implementation of fail-safes. Two final adjustments were made on the model's signals of 12/15 and 12/17. The model appears set to go as of 12/23, so expect the beta phase to end shortly.

In terms of profitability, the model was nicely profitable for 2015 and in all years going back to 2009 when backtesting began. This inspired its launch on the website in late August 2015. Unfortunately, the model experienced one of its worst drawdowns from 8/27/15 to 12/17/15 which was a blessing as the fail-safes were born which makes the model's risk/reward far more robust.


Premarket Pulse 1/4/16

Major averages fell last Thursday on higher but well below average volume. The S&P 500 sits under major resistance while the NASDAQ Composite finished under its 50-dma but a breath above from its 200-dma.

Chinese markets plummeted with the Shanghai Composite Index triggering its 7% circuit breaker which halted trading. China came in with soft manufacturing data and the People's Bank of China devalued the yuan to a 4 1/2 year low as their economy continues to falter. 

European markets are down over 2.5% at the time of this writing and U.S. futures are down more than 2%.

March 2016 will mark the start of the seventh year this bull market which has actually been a stealth bear market as of 2015. Even though the Federal Reserve ended quantitative easing, QE from central banks around the world has tried to keep this aging bull alive. But leadership continues to narrow as only a select few stocks, mostly in technology, continue higher. Unsurprisingly, indices continue to diverge as the smaller cap Russell 2000, Dow Transports, and PHLX Semiconductors all greatly lag the other major indices. The Russell 3000 which comprises 98% of U.S. equities has also been lagging. It may therefore only be a matter of time before benchmark indices such as the S&P 500 and NASDAQ Composite also get pulled down.

Indeed, each passing year becomes more challenging than the last as central banks paint themselves into a tighter and tighter corner.

We sent out a weekend report covering some of the salient events of 2015 along with an update on the VIX Volatility Model. Though the future is never certain, the odds have never been greater that 2016 will be a year of greater volatility perhaps in the form of a most welcome bear market which may then launch the start of a new bull market.

As we wrote over the weekend, volatility is our friend as it sets up opportunity for profits especially as concerns market timing as seen in 2000-2002, 2008, and 2011, all highly volatile years.

So stay tuned for what's to come. 2016 should be an exciting ride.

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