The 4 Most Important Charts to Watch in 2016

The major U.S. stock market indices limped to the 2015 finish line with weekly losses, leaving all but the Nasdaq indices in negative territory for the year. The Nasdaq 100 added 8.4% in 2015 while the broader Composite index gained 5.7%. 

The broader market S&P 500 was down 0.7% for the year and the Dow Jones Industrial Average fell 2.2%. It was the small-cap Russell 2000 that led the way lower, though, losing 5.7% in 2015.  

From a sector standpoint, consumer discretionary was the year's best performer, gaining 8.3%, followed by health care, which added 5.3%. At the other end of the spectrum, energy was by far the weakest sector, declining 23.8%, followed by materials and utilities, which lost 10.6% and 8.3%, respectively.

Editor's note: Despite the poor performance of most financial assets, one indicator pegged stocks that delivered gains of 55%, 60% and 88% in 2015. It also uncovered many of the best-performing stocks of 2014. And now it has found the Top 10 Trades for 2016. If you want the names and tickers, follow this link.

All things considered, 2015 was a tough year for investors across the entire U.S. financial landscape. Even interest rates basically posted a flat year as the yield on the benchmark 10-year Treasury note finished 2015 at 2.27%, up a measly 10 basis points. Meanwhile, commodity prices were pummeled across the board as investors fretted about global deflation with the CRB Index down 23.4%.

One important point I want to make this week -- and one that people often lose sight of in the chase for profits -- is that an investor's first priority should be to protect their downside. 

A prime example of this is 2008, when many investors lost their life savings in a relatively short period of time. We never know when or where the next major correction will emerge, so we must be prepared.  

I hope Market Outlook helped you protect your downside in 2015. In the Aug. 10 report, titled "A Look Under the Market's Hood Reveals Problems," I warned of the market's vulnerability to a deeper correction. Over the next two weeks, the S&P 500 collapsed by more than 10% to its late-August lows before recapturing virtually all of those losses by year end.

This week, I'm going to change the format of the Market Outlook a bit. Rather than the typical near-term look at the week ahead, I'm going to give you a much broader, more intermediate-term look at four key areas of the U.S. economy that I've identified as being critical to the market's direction in the first quarter to first half of 2016.

1. Retail

I am particularly interested in the retail sector because of its big influence on the U.S. economy, which can be seen in the SPDR S&P Retail ETF's (NYSE: XRT) positive correlation to the S&P 500. 

The daily chart shows XRT broke down from two months of sideways indecision on Nov. 12. This indicated the ETF's decline from the March highs was resuming and continues to target a move to $40.

XRT Chart

However, the chart also shows XRT has since tested and held its November 2008 uptrend twice -- on Nov. 16 and Dec. 21 -- and ended the year above it. 

The trendline is currently situated at $43.08. If support holds, the retail sector's larger bullish trend remains valid, which is indirectly positive for the S&P 500. But a breakdown below it clears the way for a move to $40, which is 7.5% below the Dec. 31 close, and would warn of a coincident broader market decline.

2. Housing

Because the housing sector is such an important component of the U.S. economy and stock market, the PHLX Housing Sector Index (HGX) is also positively correlated to the S&P 500. 

The weekly chart shows HGX ended 2015 just 4.2% above the October 2011 uptrend line situated at $218 after successfully testing it in mid-December.

HGX Chart

Per the correlation, continued strength from the $218 area should be positive for the S&P 500 in the weeks and months ahead. Conversely, a sustained move below it would break a four-year uptrend and indirectly warn of more broader market weakness.

3. Energy

Anyone that paid close attention to the stock market in the fourth quarter noticed it followed oil prices and the energy sector on a day-to-day basis.  

One way to track performance in these areas is via Exxon Mobil (NYSE: XOM), which comprises about 18% of the energy sector and is positively correlated to the S&P 500. And for the past several years, it has also been positively correlated to crude oil prices.  

The weekly chart shows XOM closed last year just 4.9% above the July 2002 secular uptrend line situated at $74.32 after successfully testing it in August and early December.

XOM Chart

This sets up a long-term decision point for this influential stock and, per the aforementioned correlations, an indirect decision point for both crude oil and the broader market.

4. Transportation

The fourth key to early-to-mid-2016 broader market direction is the transportation sector, as represented by Norfolk Southern (NYSE: NSC), which has maintained a 20-year positive correlation to the Dow Jones Transportation Average. Until the second half of 2015, the transports had also maintained a tight and stable positive correlation to the Dow Jones Industrial Average for 20 years.  

Similar to the other charts we've reviewed, we see NSC closed 2015 just 4.3% above the March 2009 uptrend line situated at $81.14 after successfully testing it in late August.

NSC Chart

As goes NSC from here so is likely to go both the Dow transports and the Dow industrials.

Putting It All Together 

I wanted to begin the new year for Market Outlook readers with a bigger picture look at what I believe will be four coincident if not leading indications of where the broader market is headed in 2016. This seemed especially appropriate given the market's sideways, mostly directionless activity in 2015. 

These "big four" represent major areas of the economy -- retail, housing, energy and transportation. Each must either resume its existing major bullish trend in the next month or two or risk falling into a major downtrend that could portend a weak overall start to 2016.

Although the major support levels outlined above could potentially provide new intermediate-term buying opportunities, more risk averse readers should consider waiting for these sectors to "show us" their resilience before getting too aggressive at these critical levels. Remember: Patience and discipline are the keys to success.

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