Trading Range

I have no idea what the markets will do between now and the end of the year and neither does anybody else.   I think the range we use in our cone of probability {see the post immediately below this one for what all of that means} still is valid.  That range is 1,700-2,100 on the S&P 500.  For all I know, something is going to flash across the screen that for either good or evil will render that analysis moot.  Absent an unexpected event though, probability suggests that our current projections in terms of price ranges are likely to be within the expected distribution of where the S&P 500 will potentially shake out by the end of this year.  

One of the most promising factors we have going for us is that the market is just entering its most favorable statistical period of the year.  We have written extensively over the years on market seasonality.  You can go here if you want a refresh on what we've said on this.  One of the chief takeaways from that article should be that the only print for Wall Street that matters is what posts at 4:00 PM Eastern Time on December 31st {or the last trading day if the 31st is on a weekend}.  The cynical among us knows that more than anything Wall Street wants to get paid and so a lot rides on decent market performance going into year end.  Down or disappointing years are bad for bonuses.  

One of the advantages to a pullback like we've seen is the market has given us a road map of sorts.  The market broke its decline in an area of support that dated back to last spring.  Basically it turned around right in a zone where probability suggested that at the very least a reflex rally would ensue.  Instead stocks have performed the typical "V" shaped rally that has been so common during every corrective phase since 2012.  Today is no exception as stocks are up nicely as I'm writing this.  Traders will now look to last week's market bottoms as a "line in the sand" of sorts.  Traders would initially expect and probability would suggest that any retest of the lows should now hold somewhere in the range I've highlighted in the green box above.  A break substantially below this box would get a large amount of the investment community worried that the discounting mechanism of the markets was foreseeing a worsening economic picture into 2015.  Right now this is not a concern as stock prices have now risen substantially above these lows.

The other side of this map shows something interesting, illustrated by the area highlighted in the red box on the chart.  The September-October decline left months of trapped longs.  That is nearly everybody that bought stocks from roughly late April to last week held a losing position.  Now it's possible that none of that is going to matter as we've rallied hard in the past five trading sessions. but probability suggests that we may find the going a bit tougher the closer we get back to the old highs, purely on a money flow basis.  On the other side, if we ignore the past few months and power higher into the year's end, that could be signaling potential positive in the economy that we are not yet aware of.  We will watch the markets for clues in the next few weeks.  I for one though wouldn't be surprised if markets trade flattish for awhile.

Next post will be Monday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note these positions can change at any time without notice.