The Memorial Day holiday serves as a good reminder that the 2016 trading year is almost half in the books. That might mean sticking with a strategy that's already working, or changing gears to adjust to new developments.
The story of 2016 certainly revolves around the plunge, and subsequent rebound, in the price of oil. As a reminder, oil prices started the year trading around $36/barrel. After stalling into the mid-$20s, oil is now back up to almost $50/barrel. Interestingly, oil was trading about $52/barrel at the start of 2015 - right around the corner from current levels.
Looking at the S&P 500, it's easy to see how US equities have tracked the price of oil very closely. In May of 2016, with oil prices near $50, the S&P 500 is currently trading about 2100.
At the start of 2015, when oil was last trading above $50/barrel (around $52), guess where the S&P 500 was? Yes, right around the same level - 2028.
Though we've all probably fought some draining battles in the markets over the last year and half, a Rip Van Winkle checking out in early 2015, and checking back in halfway through 2016, would likely think markets had stood still for all that time. Certainly not the case, by any means. Recent activity suggests to me that oil will remain one of the market's main drivers for the foreseeable future.
The big wildcards on the table are China and the US Federal Reserve. Further deterioration in the Chinese economy could certainly impact global equity prices, but that might also be illustrated through lower oil prices - any hit to the Chinese economy typically translates to lower worldwide energy consumption.
After 10 years of near-zero interest rates in the United States, further increases by the Federal Reserve could also rattle global equity markets. By keeping rates low, the US government has effectively been driving consumers toward market-related investments due to more attractive returns. A "normalization" in rates could create selling pressure in equities as some market participants re-adjust their portfolios.
Gold grabbed a lot of headlines so far in 2016, but in reality that commodity has cooled off significantly since the end of the first quarter. Gold started 2016 around $1060/ounce and has rallied to today's price of roughly $1215/ounce. A nice move to be sure, but one that occurred mostly during the first quarter of the year. Increasing rates, and in turn a more valuable US dollar, could push gold back down. But that could be counteracted if fear overtakes equity markets - a development that would actually push gold higher than its current levels.
Of course, nobody has a crystal ball that can accurately forecast the future movement of markets. It's for this reason that I rely on a mean-reversion approach and follow the Twenty Commandments of tastytrade.
If forced to make my own predictions (full disclaimer: this is pure guesswork), I’ll go with $1850, $45, and $1325 as my respective closing prices for the S&P 500, the price of a barrel of oil, and the price of an ounce of gold on the last day of 2016.
Feel free to comment below with your own estimates for these figures, or reach out at firstname.lastname@example.org with any other questions or feedback.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.