Bearish on S&P 500 as of February 24, 2016 at 1921 for the next 6-12 months. Fed is likely to hike one to two times this year, but not zero times as the market is currently projecting. 

In June 2014, we thought the US economy was going for a downturn and S&P 500 was going down in 2015 as the QE program was ended by the Fed. We realized that we were wrong with the prediction in terms of the timing in June 2015. It was the later expectation of the interest rate hike and the official first hike that started pushing everything in the direction in U.S. that we were trying to predict in 2014. And things were more so developing first in EM and China and bounced back to U.S. in time.

About a month ago, we published our basic macro conditions in 2016 to 2017, predicting a downturn in the world economy and equity markets, particularly EM and commodity linked countries, driven by China’s slowdown and a stronger trade-weighted dollar; we think U.S. is not an exception. We have started seeing some of the economic stats going south in the U.S. and some still remain relatively stable, particularly the ones that the Fed is watching. It’s ironic that it almost seems that the economic conditions are setting the trap for the Fed to jump in and raise the rates further before they realize it’s too late to reverse the course. Or perhaps it’s the ego of the Fed committee member that’s preventing them from reversing the course, and the expectation of the Fed is still reinforcing the strength of the economic conditions that they watch. Hence, we think the Fed will likely continue to hike the rates by one to two times this year, depending on how fast the economic conditions in China deteriorate, despite the fact that markets are predicting zero hikes. That creates a divergence between the Fed’s policy cycle and markets’ expectations, which could create somewhat a boost to not only the trade-weighted dollar, but also perhaps an increase of the USD index (although USD index maybe not so strong) as EU and Japan would inevitably continue their courses of further easing from their current “pauses”.

Thus, we are bearish on S&P 500 for the next 6-12 months and we think S&P 500 has further room of 15%-25% to go down at the current level of 1921 in 2016. We might have already seen the first leg of the bear market just then in January. We are moderately excited as things are expected to unravel to the more interesting side.