I have rewritten this weeks’ view four times, as volatility abounds. The S&P 500 equity index has apparently hit a triple bottom. I’m not sure what this means, nor what the outcome is, but allegedly they are very rare. I do know, however, that all the Armageddon and cataclysmic commentators who have been horribly wrong for the past few years have come out of the woodwork during the past week. As they say a “broken clock is always right twice a day”! Don’t get me wrong, we at MitonOptimal are cautiously positioned going into 2016, but once again not predicting the end of the modern world as we know it.
A triple bottom can be construed to be bullish. A long story made short is that a bounce off these levels three times means the buyers take ascendancy, leading to a trend reversal upwards. I did say “apparently”! There’s no triple bottom if the sellers take the ascendancy and we plough straight on past the technical support level base line. As we stated last week, volatility and liquidity are abundant and we should get a good buying opportunity this year.
One thing that has become apparent during the week, from a fundamental perspective, is that the central bankers and markets have changed their views on US interest rate increases for 2016. Even in Davos, Ray Dalio, the infamous founder of investment adviser Bridgewater Associates, is now talking about more US QE ahead, not rate increases.
Without elaborating on the “Dot Plot” (except to say it represents individual US Federal Reserve committee members’ interest rate forecasts over time), chart 1 shows the unanimity behind December’s 25 basis points rate hike and that most were expecting short term rates to be 1.25% (from current 0.5%) by the end of 2016.
Since then, there has been a sea change in market expectations for short term US interest rates and therefore, in effect, a more normal interest rate curve. Chart 2 shows how, mid-month, there is now a 75% implied probability there will be no, or only one US interest rise in the year ahead. A sea change or uncertainty? Neither of these is enjoyed much by investors as one can see.
Triple Bottoms & Dot Plots
