2016 from a 10,000-Foot View

SMH – Semiconductors had their best year since 2009.

KRE – Regional banks finally above their 2007 highs.

DX – Another strong year for the U.S. Dollar

IBB – first negative year for biotechs in 8 years.

EWZ – Brazil had its first positive year in the last 6.

IWM – big comeback for small caps after a 26% drawdown in late 20015/early 2016.

XIV – betting against short-term volatility worked out again.

QQQ – 8th consecutive positive year for large cap tech.

What year had the big six tech innovators? – AMZN, AAPL, GOOGL, FB, MSFT, TSLA.

Check out my newest book: Top 10 Trading Setups – How to find them, When to trade them, How to make money with them.

Market Lessons in 2016

January

The year started with a big gap down in all stock indexes and a reminder that “oversold” and “diversified” mean little during forced liquidations. Crude oil dived lower and it took all stocks with it. The 3X inverse crude oil ETF DWTI went from $200 to $400 in three weeks. The small-cap biotech ETF, XBI was absolutely obliterated and lost 38%. My most-read posts in January were: 10 Musings about market corrections and 13 More Thoughts about Bear Markets.

A few months earlier (in September 2015) I wrote a book, explaining the different stages of corrections and how to approach them: Crash – How to protect and grow capital during corrections.

February

There was a major momentum divergence in U.S. market indexes which marked the bottom in U.S. indexes. Emerging markets had already bottomed in late January. Gold and silver miners showed notable relative strength early in the month and were massive outperformers during the market recovery. Small-cap miners like CDE went from $2 to $16 in six months.

My most-read post this month was The Two Best Performing Stock Groups after a Market Correction. It was spot on.

March

You don’t have to catch the exact bottom in order to benefit from a market recovery. You can wait a few weeks to see a confirmation of a new uptrend and still do incredible well as more and more sectors join a rally.

Emerging markets began a huge rally in early March. The 3X long Brazil ETF, BRZU went from $10 to $50 in in the following six months.

My most-read posts for the month were: What happens after a 10% market correction, What overbought breadth readings mean, and The Only Time to Savely Bottom-Fish.

April

The biotech sector finally joined the bull party. Small caps started to outperform large caps.

My most-read posts for this month were: An example of a failed breakdown and Some of the Most Shorted Stocks are Setting Up for Potential Breakouts.

May

The first major pullback to a rising 50-day moving average was ferociously bought.

June

Brexit surprised the market. It led to a quick two-day crash, followed by just as quick and impressive snapback. The recovery in the large-cap tech ETF was especially striking. QQQ was at new year-to-date highs two weeks after the Brexit correction.

July

A major technical breakout in the semiconductor sector. Even if you missed the first six months of the year, July was not too late to join the market rally.

August

The market is in a good mood. Recent IPOs like ACIA are reaching for the sky. One of the most powerful setups is a hot recent IPO and a bull market.

September

Amazon reached new all-time highs, cementing its place as one of the most incredible stock market stories. $1000 invested in AMZN on its IPO day in 1997 is worth about $440,000 in 2016. The little detail is that Amazon had a 90% drawdown in 2000.

October

The biotech sector rolls over as the market fears the potential impact of a Clinton’s administration on drug regulations and prices.

November

Donald Trump wins the U.S. presidential elections. The stock market goes limit down the night of the elections. Then, it stages one of the most massive short-term rallies in its recent history. Interest rates skyrocket. Financials break out and don’t look back.

I published my newest book in November: Top 10 Trading Setups – How to find them, When to trade them, How to make money with them.

December

New lows in volatility. The inverse volatility ETF, XIV triples from its lows in February, 2016.

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137 Stocks Doubled in 2016

137 stocks more than doubled in 2016 (they are currently priced above $4 and trade over 100k share per day). Many of them belong to sectors that no one expected to see among the big winners in early 2016 – oil & gas and industrial metals. Only four out of the 137, had a good 2015 and can be labeled momentum stocks. All others are mean-reversions in beaten-down stocks. This distribution is unique for 2016. There was a major correction at the end of 2015 and the beginning of 2016 and then a major recovery. Most of the best-performing stocks after deep market corrections are the ones that got hit the worst during the correction. In most years, the best performers are equally distributed between momentum (stocks that had a great previous year) and mean-reversion (stocks that had a horrible previous year).

Basic materials: 59

Consumer goods: 7

Financial: 7

Healthcare (including biotech): 13

Industrial goods: 14

Services: 14 (mostly airlines, education svs, shipping)

Technology: 19 (mostly semiconductors like AMD and NVDA)

Utilities: 4

Here are the top 15 in term of performance:

Check out my newest book: Top 10 Trading Setups – How to find them, When to trade them, How to make money with them

Six Charts that Defined 2016 and Might Impact 2017

Here are six charts that defined price action and investors’ psychology in 2016.

1. The U.S. dollar added to his gains from last year. This has helped small caps to outperform. It would be interesting to see of any of the large-cap multinationals starts complaining about the Dollar’s impact on their margins.

2. Emerging markets continue to underperform. The strong dollar is the main reason.

3. The spike in interest rates has been a boon for financials.

4. The biotech sector has been naughty in 2016. Most momentum stocks tend to give back 50% to 80% of their upside move after they break down. IBB is down about 33% from its all-time highs. Biotech has always been a sector of stocks with relatively low correlation among them.

5. Both, value and momentum can work.

6. The best performers after a deep market correction are usually the stocks that were hit the worst during that correction.

7. Bonus graph

Check out my newest book: Top 10 Trading Setups – How to find them, when to trade them, how to make money with them.

You Can Learn A Lot In An Uber

We  often take an Uber when we go out at night. I always like to talk to drivers. The other day, my driver was a recent immigrant from China. As most drivers, he likes the flexibility that Uber offers, but it is a part-time job for him. He is looking to branch out in a different business.

What do you want to do, I asked him.

Him: “Real estate. This is what we did in China. In fact, I just bought four 2-bedroom units in Pacific Beach and I am renting them out for $2,500 a month each. We are considering trying out short-term renting via AirBnb to double our income”

Pacific Beach is not Detroit. The median price of a 2-bedroom unit is $750,000.

I know it’s not easy to transfer so much money from China into the U.S., so I asked him about it.

Him: “China doesn’t let you transfer more than $50k per year per person. We sent our money first to Hong Kong and from there an Investment Bank helped us to transfer it to the U.S. for a 10% fee. We are still happy with the deal. I want my kids to grow up in a free country. China is still a communist country, where freedom of speech is not really allowed. The government controls everything.”