Stocks may have struggled in the past two weeks, but one top strategist predicts the rally will regain momentum. » Read More
By: Annie Pei
One RBC strategist sees tough times ahead for oil. » Read More
Stocks may have rebounded from their recent lows, but the option market still implies a big chance that stocks plummet anew before the year is out.
After falling as low as 1,810 two weeks ago, the S&P 500 Index bounced significantly in the prior week, closing Friday trading at 1,918. But even as stocks somewhat regained their footing, the market's fear certainly has not dissipated.
According to options market data from multiple providers, the December quarterly options expiring at the end of the year imply a 50 percent chance that the S&P 500 will touch 1,600 at some point in 2016. That would be a drop of nearly 17 percent from current levels and a full-year decline of 22 percent.
And it's not just that big moves are generally expected in this more-volatile market. The converse upside level — the highest point which traders think the S&P has at least a 50 percent chance of a touching in 2016 — is 2,110, or just 10 percent above Friday's close.
The dramatic amount of downside traders appear to be bracing for "tells you that this is sustainable fear, even going out six to twelve months," Brian Stutland of Equity Armor Investments said last week. "People clearly think that the downside could be real, and they want protection."
Anyone who believes that the global economy isn't crashing must be delirious, according to David Stockman.
The former director of the Office of Management and Budget argues that a rapidly deteriorating economic environment is going to send stocks and oil prices spiraling even lower than they already have.
"I think your traders are smoking something stronger than what I can legally buy here in Colorado," Stockman said Thursday on CNBC's "Futures Now."
The S&P 500 has fallen 6 percent year to date, and crude oil has plunged more than 17 percent. However, Stockman still sees a long way to go. He expects the S&P 500 to drop to 1,300 before making any new highs, and sees oil falling below $20.
Investors have been too optimistic about the U.S. economy because they are not factoring in global risk, said Stockman, who expects to see a recession by the end of the year.
"Everywhere trade is drying up, shipping rates are at all-time lows," he said. "There is a recession that's going to engulf the entire world economy, including the United States."
Contributing to the turmoil is the ineptitude of central banks, he said. While Stockman doesn't expect the Federal Reserve to adopt a negative interest rate policy, he said monetary policymakers have exhausted all other options.
"They should have the good graces to resign. They are lost. None of this is helping the economy," he said.
Add in the 2016 presidential election, and Stockman said the markets will find themselves in a situation similar to that of the global financial crisis.
"The out-of-control election process will feed into and create an environment that we haven't seen since the fall of 2008," he said.
Of course, this isn't the first time Stockman has been bearish. For years, he has been predicting a crash worse than 2008.
Stockman headed the White House OMB during President Ronald Reagan's first term.
Wall Street is breathing a sigh of relief as the S&P 500 has rallied nearly 5 percent from its recent low. But before investors put more money on the table, one widely followed market watcher said to "buckle up" for more volatility.
"I'm not looking for a bear market. We have further to go, but I don't think it's going to be a major downshift from present levels," said the vice chairman of Blackstone Advisory Partners. A bear market is loosely defined by a 20 percent or more decline from a recent high. The S&P 500 is currently 11 percent from its May 2015 peak. "I don't think we've seen the ultimate lows," he added.
For Wien, the market will continue to come under pressure as the earnings picture deteriorates and the oil market remains unstable. Many of the gains and losses in the equity market this year have been a result of sharp moves in the oil market.
"Oil has been the key factor [this year]," he said. "If you want the stock market to prove me wrong and continue to rally from here, you really need oil to stabilize and move up."
Wien noted that the correlation between oil and stocks did come as a bit of a surprise, as many thought the decline in oil prices would benefit the consumer and therefore boost stocks. "We did think originally that a decline in the price of oil was favorable, but now I think a rise in the price of oil indicating the whole system would be stable is the most bullish thing that could happen."
Ultimately, Wien expects the S&P 500 to close the year negative by approximately 5 to 10 percent. The index is currently trading around 1895, more than 7 percent lower than where it started 2016.
"My view is that there's still bad news out there. … We're going to reach a bottom somewhere in the first half," he added.
Things haven't gotten bad enough to get good again.
That's the paradoxical zone in which stocks find themselves, according to some market-watchers. Despite a dramatic (and deep) decline to start off 2016, an absence of the type of panicky selling that so frequently marks a bottom may suggest that the worst is not over for equities.
"There are three reliable signs of a market bottom, where things get so bad it is safe to step in," Convergex chief market strategist Nicholas Colas wrote Friday.
"First, when the S&P 500 drops 5 percent or more in one day. Second, when the CBOE VIX Index tops 40. And third, when everything sells off for a few days and correlations for all equities approaches one," Colas added. "None of these events have yet occurred. And so we wait…"
The VIX, which is calculated from the prices of options on the S&P 500, is a widely watched by traders, since it gives an indication of how much nervousness is in the market.
Interestingly, while this index has certainly risen over the past three months, it has not reached levels that would suggest investors are buying "insurance" (in the form of bearish put options) at any price. The VIX has barely crossed above 30, while it rose above 40 in August, and reached nearly 90 in 2008.
Longtime VIX trader Brian Stutland said last week on CNBC's "Futures Now" that he's looking for the VIX to display "this sheer sense of panic, where people are just grasping for insurance to protect themselves. That's what I want to see in the market before I become a buyer."
With the S&P 500 near 52-week lows this year, investors are searching for clues on where equities could head. And while many assign blame on the collapse in oil and economic uncertainty in China, one of the Federal Reserve's fiercest critics is pointing the finger at one person: Janet Yellen.
"Unless the Fed totally capitulates, this bear market is going to be brutal," Peter Schiff, head of Euro Pacific Capital, told CNBC's "Futures Now" on Tuesday. A bear market is loosely defined by a 20 percent drop from a recent high. The S&P 500 is down 13 percent from its May high.
"What we need to stop this bear market, is full-on quantitative easing from the Fed. Every time the market has corrected, since 2008, it's always been the Fed that's made the bottom," said Schiff. "The Fed has always saved the market either by cutting rates, launching QE or threatening to launch another round of QE. So, they're going to have to give the drug addicts on Wall Street what they want."
Schiff vehemently maintains that central bank policy has served as the most destructive force in the U.S. economy. The S&P 500 has fallen 9 percent since the Fed raised interest rates in December for the first time in nearly a decade.
For Schiff, the U.S. will stay in a recession and stocks will continue to fall unless there's a reversal in policy. "I think the bubble has already burst. The question is if the Fed is going to fill it back up with air before too much comes out," he said. "This is an election year and Janet Yellen is playing a game of chicken with the markets."
The Fed critic has long voiced his opposition to monetary policy, but given the recent volatility, he is more convinced than ever that the Fed will have to reverse its course. "The only question now is how much longer the Fed will wait before it indicates rates are not going up, then cuts them to zero, launches QE4 and then lowers rates to negative," he said.
As far as his other bold predictions, Schiff maintains that gold will eventually hit $5,000 an ounce. "Gold is up $150 since the day after the Fed hiked rates," he noted. Gold has been the best performing asset in 2016. "Gold now has to reverse the last three years of loses because they were all based on a fantasy of a legitimate U.S. recovery. I think we're heading a lot higher."
Ultimately, Schiff believes gold will hit $1,300 per ounce in 2016 with potential to reach $5,000 in the coming years provided that the Fed cuts rates and relaunches QE.
Corporate America, we have a problem.
The fourth quarter of 2015 looks to be the third straight quarter in which S&P 500 companies' profits fell versus the year prior. This would be the first time this has happened since 2009 (when profits fell in Q1, Q2 and Q3).
The official numbers aren't out yet, since not every S&P 500 company has reported results for the period. However, a combination of the results from the first 63 percent that have reported, and the expected results from those companies yet to report, yields a combined earnings decline of 3.8 percent, according to FactSet. (Note that this number should rise a bit as results are released, as the average company beats expectations.)
To be sure, the low-oil-plagued energy sector, and its 74 percent earnings decline, has been a big contributor to the overall drop. But it's worth noting that six of the ten S&P 500 sectors are seeing their earnings fall compared with fourth quarter of 2014.
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