The silly season of prophecy and forecast is among us. The seers are preaching what’s coming in 2016 and gullible investors are lapping it up. While I’m not a big fan of predictions laced with certitude, nor those that peddle such, I do think we can learn a thing or two from their craft. For starters, I find it impressive that someone like say, Peter Schiff, can continue to pound the table on their predictions (gold is going to $5,000) despite having been wrong for years. His conviction in the absence of any confirming evidence in gold for the past four years is admirable (or sheer lunacy…). The one thing I like about him and his ilk is their ability to build a thesis complete with sexy sounding stories and then stick to the narrative come hell or high water.

As traders we typically don’t have the luxury of being wrong for four years. Of necessity we must adapt, adjust tactics when the winds shift, regardless of our original forecasts.

One of the skills that traders should seek to develop over their trading career is that illustrated by Schiff: The ability to anticipate what could happen and to build a powerful argument to support their view. Such a skill helps identify trade ideas with the potential to provide profits time and time again as you continue to deploy trades around your forecast. Where your road should diverge from that traveled by Schiff, however, is the ability to both identify which price signals will prove your forecast wrong and pre-plan trade adjustments if such an adverse move transpires.

With that in mind let’s peer into my cloudy crystal ball to see what you should keep an eye out for in 2016.

The Elusive Oil Bottom

We begin with perhaps the most obvious event to anticipate: the oil bottom. Stock watchers the world over are just dying to know when the oil bear will finally be felled. We look on with envy to those who possessed the fortitude to snatch up oil on the cheap in the aftermath of the 2008 crisis. They enjoyed quite the profitable ride in the ensuing years. Reversals are oh-so-easy to spot in hindsight. It’s catching them in real-time that’s the insanely difficult part. So what do to? Here are my top two suggestions for playing a potential oil bottom in 2016:

One: Don’t be a hero. You’re not Clark Kent. And you certainly don’t have to be the first one in when crude finally does bottom. There will be plenty of time and profits to be had once it’s finally obvious it’s turned. So don’t feel like a loser if you wait for an actual uptrend to take root before you initiate a few bullish plays. Given the severity and length of the oil bear market it will likely take some time before the damage has healed and a bona fide uptrend materializes.

Two: If you can’t help but bottom fish, do so with intelligence. Curb your ego and realize you’re probably early and will have to sit through some pain before the long awaited crude reversal arrives. To ease the pain I suggest scaling in. If you’re buying shares of stock (USO, XLE, XOP, etc…) buy a partial position but leave room to add more at lower prices to improve your cost basis. Use options to increase your probability of profit (i.e. sell OTM puts) and generate cash flow to your reduce your basis on any shares while waiting on the inevitable rebound.

The Bond Top

With the December Fed rate hike the termination of ZIRP (zero interest rate policy) finally arrived. With the path of least resistance for interest rates now pointing higher, bond prices are likely to stumble – or at least not rise much – in the months/years ahead. Thanks to the bevy of bond funds there are some easy ways to exploit such an outcome. The king of bond ETFs, and incidentally the fund most sensitive to changes in interest rates is the iShares Treasury Bond (TLT). TLT tracks long-term government bonds.

To be fair, we’ve been hearing of imminent doom for bonds for years now, and thus far the bond bear is still in hibernation. Nonetheless, I suspect he will awaken soon, and besides, we can structure trades to profit if TLT simply doesn’t go higher (bear calls, anyone?). As shown below the price of TLT has sputtered in 2015 but has yet to fully rollover into a downtrend. Be on the lookout for support breaks in the months ahead to signal the bear’s arrival.

It’s worth pointing out what will prove us wrong. Any kind of major downturn in stock prices in 2016 will send rates lower and thus TLT higher. Scaredy-cat investors almost always run into Treasury bonds when stocks are suffering. The other potential hiccup would be a significant economic slowdown taking root. That, too, would exert downward pressure on rates. Barring those two developments the odds for neutral to bearish movement in TLT looks good.

How to play it? I like TLT bear calls when IV is neutral to high. If option premiums shrink too much consider put calendars.

Were I to throw out a third theme it would probably be the potential for a peak in stocks. You know, the final death knell of our aging bull. I’m going to circle back and cover my thoughts on this soon.

Have a profitable 2016. I hope you kill it!

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