In my February article titled "Here Is Why The Markets Should Generally Suck For The Rest of 2018" I spoke about the S&P hitting 2200 at some point this year. There are still a few trading days left in the year with the S&P sitting at 2351. With the recent volatility 150 points on the downside could happen tomorrow.
Admittedly, as the markets sold off into the first couple weeks of December, I wasn't expecting my target of 2200 on the S&P to come anywhere close being hit. I was, in fact, expecting a substantial rally to end the year. There were numerous, highly relevant support areas for the markets combined with sentiment readings that when combined created a statistically significant probability of rampant upside.
What happened is the support areas, sentiment readings and favorable seasonal aspects of the market got hit with a voracious combination of anomalies. Those anomalies have now caused the markets to more or less collapse during the back half of December.
What we are experiencing currently is exactly what anomalous behavior by markets in the face of numerous favorable data sets should do. When markets do not correspond to normal functionality, being overwhelmed by anomalies, they essentially break. They cease functioning as anything but a mechanism that feeds on itself in one single direction.
The question to ask is now that the markets are effectively broken, what is the next course of action? While there is a lot of fear in the markets as determined by nearly every gauge of sentiment and price behavior available, the general sense I get is that investors are looking to play a bounce in the markets more than anything else. Everyone knows how powerful the bounce will be given such compressed prices and sentiment so they want a piece of the action.
Therein lies the problem of the next few weeks for equities. We are now approaching a new year and with that investors have a tendency to think that with the flip of the calendar comes what are likely to be seasonally favorable factors, as well as an earnings season that "can't be that bad, as the economy is still functioning at normal levels." This natural tendency to want to buy stocks in the new year and the predominant view that earnings don't justify this level of panic is plain and simply the next trap for investors. The game then becomes too easy for such a profitable buy point. The window for a sustained rally and the bottom that everyone seems to be looking for has therefore been closed.
This doesn't mean that we won't see a decompression type of rally that is sharp and violent in the next couple weeks. However, it will be short-lived and ultimately, disappointing in nature.
Yes, catching the bottom from whatever price level it comes will be an extraordinarily profitable endeavor for those who manage it properly. As a result, however, expect the markets to make it as difficult a proposition as any.
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