Unexpectedly Intriguing!
February 22, 2016

Before we get into explaining the major market driving events of the week that ended on Friday, 19 February 2016, we're going to test your ability to interpret what our alternative futures chart is communicating. Here's the chart showing all the action that has taken place in the S&P 500 since 18 December 2015, where we've drawn a red box around the most recently completed week.

Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshot on 19 February 2016

Here are your test questions:

  1. Approximately how far forward in time were investors looking at the close of trading on Friday, 12 February 2016?
  2. How did their forward-looking focus change on each of the four days of the Presidents Day holiday-shortened trading week?
  3. How far forward in time were they looking at the close of trading on Friday, 19 February 2016?
  4. If investors were to maintain their forward-looking focus on the period of time you identified as your answer to the previous question, and assuming that the projected future doesn't change and that there is no sudden onset of a noise event, would you expect the S&P 500 to rise or to fall with respect to its value on 19 February 2016 at the end of the first quarter of 2016?
  5. What events prompted the changes you observe in the actual trajectory of the S&P 500 during the third week of February 2016?

The first four questions are pretty easy, or should be really easy if you're one of our regular readers!

The last question is definitely the hardest, and we don't expect that you would know the answers off the top of your head without doing some research. Fortunately, we kept track of the main market driving events that we saw during the past week, so all you need to scan through the following discussion of what we found to be the major market driving events of the third week of February 2016 (or if you prefer, the seventh week of 2016), where nearly all of the above questions will be answered!

  • 16 February 2016: After finishing the previous week by splitting their forward-looking focus between 2016-Q1 and 2016-Q2, investors shift their attention more toward 2016-Q2, with stock prices rising as a result. That rise is in part attributable to the prospect of a deal between Saudi Arabia and Russia to freeze their present oil production levels, which boosts the oil and energy sector of the market.
  • 17 February 2016: Stock prices open considerably higher, as energy and materials stocks lead the way again, as the speculation that the U.S. Federal Reserve will adopt a more dovish policy with respect to short term interest rates takes hold. The release of the minutes of the Federal Open Market Committee reinforce that sentiment, as investors push back the time they expect the Fed to next hike short term rates to the fourth quarter of 2016. Well after the market's close, comments by St. Louis Fed president James Bullard work to cement that expectation through the rest of the week.
  • 18 February 2016: The S&P 500 closes down little changed on a day with little market moving news, as investors appear to significantly discount the reported better than expected drop in new jobless claims that might otherwise have prompted them to shift a portion of their forward looking focus back toward the less distant future.
  • 19 February 2016: The S&P 500 closes essentially flat, but ever so slightly down, from the previous day's close, as investors discount the news that U.S. inflation apparently spiked in January 2016, thanks primarily to government policy-influenced increases in rent, in-patient hospital care, and health insurance costs.

So, all in all, things went just about exactly as our alternature futures model led us to suggest last week:

The good news though is that stock prices are likely to be less volatile over the next two weeks than they were in either January 2016 or in the first two weeks of February, at least in the absence of market driving news that might cause investors to suddenly shift their attention with little warning to more distant points of time in the future, which would be a good thing in the short term if that were to happen.

And so it was in Week 3 of February 2016. We'll know next week if that continued to hold in Week 4, after which, what we called the "short term" will be just about over....

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