Possible Market Scenarios {The Scarier Flop & The Flop}.

Today we'll show our final two chart scenarios.  We'll call these "The Scarier Flop" and "The Flop." These are so named because they describe a choppy directionless market that sort of flops around for the rest of the year.  Both scenarios would more or less get you to the same place by the end of the year or early 1st quarter of 2017.  Both show markets that in essence go no place in 2016.  As before, for the basic parameters on each chart please refer to the first post in this series, numbers 1-5. Also again please note that this is scenario analysis and not a prediction or guarantee that any of these events will occur.  It is possible that more than one of these events could occur or none of them might.  You should consult your own financial advisor or do your own research if you are not a client of our firm.  Better yet you can hire us.  In short if you use anything that you see here or have seen over the last few days without some follow up then you're on your own.   

Now to the charts: 

First "The Scarier Flop".

The "Scarier Flop" is so named because it shows a market breakdown first.  It shows a market that rallies to somewhere close to break-even or perhaps even a slight gain for the year by late spring/early summer.   After a rally from this winter's lows, in this scenario we experience a short period of indecisiveness before the market rolls over again, perhaps sometime in the summer as election jitters start to prevail.  In this scenario we again retests the lows set in the January/February period.  While the chart doesn't show this, there is also the possibility that these lows are violated with a potential bottom made between 1750-1800 on the S&P 500.  In this case however, the market then experiences a furious and sustained rally, perhaps due to better economic news or a perceived better outcome to the elections.  In any event, stocks end the year close to where they began, plus or minus a few percentage points.  

This has a probability of occurring based on our understanding of current events of around 50%.

Now here's "The Flop".

This is the easiest chart to explain.  It's a market that finds some level of support over the coming weeks and basically goes nowhere before rallying, likely sometime after the elections are resolved.  It also ends the year close to where the market began 2016 plus or minus a few percentage points.

This in our view has a probability of occurring based on our understanding of current events of greater than 50%.  Part of the reason we think this has the highest probability of occurring is that this is most likely the direction of the greatest pain for investors.  Let me explain.  

Wall Street in aggregate is very bearish on the market and the economy right now.  That means there's a substantial amount of money that is set up to take advantage of what many perceive is an inevitable market breakdown.  There are so many ways for the fast money/hedge fund crowd to do this that it's impossible in this space for me to explain how this can be done.  Likewise nobody should underestimate how easy it is for bullish sentiment to take over once the market starts to gather some positive momentum.  Therefore, a market that is choppy and essentially goes nowhere is an environment where it is very hard for all but the most nimble of investors to make money.  That in general does not include institutions that run billions of dollars.  It's a market that might make day traders happy but almost nobody else.  That's why I think a directionless market is the pain trade now in 2016.  

In any event I've laid out our different scenarios and will acknowledge that there are perhaps others out there that I might not have thought of.  Now we'll just let our indicators be our guide.

Charts are from TradingView.com.  Annotations are mine.

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