an tSionna {03.19.15}

S&P 500 via its ETF SPY.  Chart is from Stockcharts.com. Market's exploded higher toward the upper end of of the trading range we've been in since last fall yesterday.  We will have to see how the markets react to this resistance level.   Stocks fell lower the last time we were here back in February and today we've opened slightly lower.  There are two schools of thought leading to the uncertainty and volatility we've been seeing the past few months.  I'll try to briefly summarize both schools of thought below.

On the one hand and the more bearish case is the fact that stocks aren't cheap {17 times earnings as we speak} and that earnings estimates have continued to come down.  Earnings are now basically flat with last year for calendar year 2015.  Also it seems as if somebody tapped on the breaks to the US economy a bit.  The Federal Reserve basically acknowledged this when they said yesterday that they were in no hurry to start raising rates.  They basically said they were seeing lower growth, lower unemployment and lower inflation.  While the actual unemployment rate is the best we've seen in years at 5.5%, I think the Fed is looking at the underemployed and the folks that have given up looking for a job and seeing more softness in that data from what the actual employment statistics are telling us.   You are also starting to hear a bit more chatter about the winter's effect on the economy, especially in regards to the Northeast.  Boston had its snowiest winter ever!

The sunnier side to this is that perhaps investors are looking through the earnings declines as the majority of those have occurred in the energy sector.  Those making that argument will also say that we haven't yet seen the full effects of the decline in energy prices on consumer spending.  They think the consumer has been reluctant to spend much of the windfall because of concerns that the decline is only temporary and we'll start seeing the full effects of this come summer.  They also think that stocks deserve to trade at higher multiples in an era where interest rates are so low.  

I buy a bit into both arguments, hence my more neutral outlook.  It's hard for me to be completely bearish as I think the economy is doing better in many ways than most people expect.  I think that part of the reason we don't see all of this is because I'm not sure we have the tools to capture some of what I see happening out there.  For example how to you measure the economic impact of somebody who makes a living buying and selling product on line?  How do you measure the impact of the millions of people working illegally or off the books here?  Maybe those tools are out there but I've never seen them or had anybody tell me where to go look for them.  On the other hand I think the decline in earnings this year and the higher valuations than we've seen in many years puts a lid on price advancement at some point.  I think stocks have the potential to trade to around the 2,250 level by year end.  {PLEASE NOTE: that I said stocks have the potential to trade to around 2,250 not that they will get to that point.  For all I know we'll never see that price or maybe we'll blow through that level on the way to something much higher.  I deal in probabilities not possibilities.  Anything is possible but not everything is probable.}  

I think it is unlikely that stock prices  are going higher in a straight line and I think there is a higher probability that we'll see at least one correction of 10% before this year is out.   That said, I also think it a low probability event that we are on the cusp of a major market change based on the evidence we see at this point.  We may see higher volatility than most have become used to going forward in stocks but most data sets at this point are indicating the chance of a recession.  At the end of the day perhaps we are just going to be in a period where stocks flop around in a trading range, frustrating both the bulls and the bears.  Maybe stocks will simply correct by time.  We'll end up at some point down the line having in essence gone nowhere in the major indices.  We'll let our indicators be our guide.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note these positions can change at any time.