Stock prices tend to retrace their steps. Much like lightning hitting the same spot.
Note the below chart which compares S&P500 performance during the second quarter of 2015 (15Q2 green line), third quarter of 2015 (15Q3 red line) and the current quarter (16Q2 thick blue line).
15Q2 was characterized by an extremely stable range bound market that fluctuated no more than 3.5% (2058-2131).
15Q3 was much more volatile with a 14% swing peak-to-trough.
Personally, for no other reason than the uncertainty of this presidential election cycle, I’m skeptical that the market can remain range bound like it did in 15Q2. So that leaves two outcomes- it either breaks out or breaks down.
For the market to break out to all-time-new highs, one of two things would likely occur:
- Stable oil above $60/barrel (to ensure a healthy energy sector), low interest rates (to favor borrowers), and a low US Dollar (to favor exporters/multinationals). Unless there is a major conflict in the Middle East, I find it hard to believe that the oil glut can rebalance quickly enough to sustain $60 oil. Also, a recovering energy sector would likely promote an expanding economy which would tend to raise both the US Dollar and interest rates, thus acting as headwinds to borrowers and exporters/multinationals.
- The markets are also likely to rise (dramatically) if the Federal Reserve intervenes with QE4 stimulus. Not unthinkable in an election year.
Any number of “shocks” to the system could cause a breakdown that tests the two recent double-bottom lows (Aug/Sep ’15 & Jan/Feb ’16). A shock could include: steep decline in oil prices, terrorist attack, unexpected inflation/deflation, China currency devaluation, major country/company default, presidential uncertainly…all within the realm of possibility. Or perhaps a totally unforeseen event like a devastating earthquake.
I have no way of foretelling the future, but with the market near all-time highs and little fundamental justification, I remain cautious and concerned.
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