3 SCENARIOS FOR THE WEEK AHEAD WITH 3 DIFFERENT OUTCOMES FOR 2011 PERFORMANCE
The current state of the market is grounded in a propensity to deceive and then runaway before investors get a chance to react. That's all there is to it really. It's a sloppy range that has been on the verge of bending and breaking in both directions a dozen times. Each and every time a group of investors get sucked into believing that an actual multi-month trend (remember those?) would appear and provide some consistency. That's when the buzzer flashes and hopes turn to nightmares.
We're at a point now where the expectations of a Christmas rally have been dashed somewhat with the recent weakness in the averages. However, each time the market catches a bid it seems that traders are jumping on the Christmas rally bandwagon. The desperation to be on the right end of performance is causing a chase the bids mentality that the markets loathe at their deepest levels. Hence the propensity for moves that gap up and away to a point where traders can't pull the trigger because of the the hollow ground beneath them. The deception involved has grown more sophisticated as the participants have been narrowed down to a field of short-term orientated traders who are relying on similar technical information to make the next trade. The market is adapting.
The Christmas rally will begin on a late schedule this year just as everything else has been late in 2011. Rallies come in the last hour of half hour of the day. The majority of gains (or losses) take place at the end of the month. It seems that everything has been back end loaded this year. Traders aren't willing to make the real decisions until either their day or even more so their month is on the line. What will happen when the day, month and year all line up this year for the final week of trading?
Will traders become apprehensive of evaporating further capital and just pullback? Will they become more aggressive to gain performance and jam the markets in the final week of trading? Will they become skittish and just sell everything in sight?
I think the answer lies in the action that will take place in the week ahead. Let's look at the different scenarios:
1. A sideways market this week: This will likely give way to apprehensive trading into the final week of 2011. There won't be much in the ways of incentive to either press or take the foot off the pedal. This type of scenario has us closing right around the 1200-1220 level to end the year. A negative year for the S&P.
2. An up market this week: I'm not sure that outperformance this week will lead to chasing the bid in the week that follows. You have to think about how the market has been greeting chasers all year. If we get one or two strong up days this week EVERYBODY is going to pile on. This doesn't mean the market is going to shoot through the roof. The market will be left bidless quickly and the possibility opens up for a substantial decline into the final week of the year. Under this type of scenario we end the year around 1180-1200. A -5% year for the S&P.
3. A down market this week: This is the best case scenario for the market into the end of the year. The cushion of a -5% year going into year end will be enough to bring out the buyers. Sellers may begin piling on this week if the market sells off late into the week with the hopes of a Christmas rally all but vanishing with a move to 1180. This will be the opportune time for a Christmas rally to begin with the final week seeing a move to 1230-1240. A down market this week may be the best Christmas gift the bulls could wish for.
