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Market Outlook…
The following is an excerpt from a FindLeadingStocks.com intra-week update… The market continues to “pause” and “digest” late August’s steep sell-off which is perfectly “normal” and “healthy” especially after a big move. So far, our call that the market placed a near term (potentially long term) top on Aug 20, 2015 remains in play.
Sideways Action Continues Until These Levels Break
By definition, we expect the market to move sideways until the benchmark S&P 500 closes above near term resistance (1993) or below near term support (1867). Stepping back, the market is weak and the fact that it can’t bounce from deeply oversold levels leads us to believe it wants to move lower from here. Of course, the giant elephant in the room is the Fed. They are scheduled to meet on 9/17 and hold a press conference which is always fun.
The Fed’s Dual Mandate
We don’t believe they will raise rates but with the Fed, anything is possible. Remember, the Fed has a dual mandate: Help the economy/employment and keep inflation near 2%. Right now, the global economy remains lackluster at best and deflation remains more of a threat than inflation. So if neither one of the Fed’s mandates are being met: why would the Fed raise rates next week?
3 Bullish Points To Keep In Mind
To be clear, the market is in correction territory and has formed a new downtrend. But if the market turns higher (enter any positive headline the market wants to focus on) -we can easily move higher from here. Here is the “bullish” case for stocks to rally:
To be clear, the market is in correction territory and has formed a new downtrend. But if the market turns higher (enter any positive headline the market wants to focus on) -we can easily move higher from here. Here is the “bullish” case for stocks to rally:
1. Fairly Valued: We do want to note that they S&P 500’s P/E ratio is in the mid teens and we haven’t seen a major market top with the P/E below 22 in the past several decades. That doesn’t mean we can’t top out with a lower P/E ratio – It just means that it hasn’t happened in the last few decades.
2. Rates Are At Zero: Secondly, rates are at zero- we haven’t seen a big top in U.S. equity markets when rates are at zero anytime in recent history. Again, that doesn’t mean we can’t top out with rates at zero – it only means it hasn’t happened yet.
3. “Only” 8.5% Below A Record High: Even with all the negative headlines, heightened volatility, and steep selling, the S&P 500 is “only” -8.56% below its record high! One would think we are down much more. Just some food for thought in case we decide to rally from here.
Bottom line: For us, we need to see the S&P 500 jump above 1993 and then back above 2040, then 2050 before we will turn bullish on the market. As long as we stay below 2040 – by our rules – we have to expect this sloppy sideways-to-lower action to follow.