Cannot reiterate the following enough: the 3,000 level for the S&P 500 isn't just a cool, neat round number that creates a focal point of attention to the fact that the U.S. markets are pummeling the rest of the world when it comes to overall stock market performance. The 3,000 level also happens to be the meeting place for a number of trajectory points that have some very important DNA, spanning multiple decades for the markets.
These types of price points happen to cause volatility, disarray and a general sense of unpredictability in equities. Paired with the attention that is naturally given to neat round numbers on major indices, the markets will take their time in digesting the 3,000 level. How so?
Through unpredictable volatility that throws the masses off the scent of the market. And, let's be clear here, there are going to be plenty of catalysts for unpredictable volatility throughout July:
- Interest rate policy is far from clear following Friday's job report
- There is a better than even chance that fixed income investors across the curve are currently misallocated, resulting in interest rate volatility throughout the remainder of summer
- Earnings are going to be all over the place. Guidance, as well. The macro scene is compromising overall confidence in being bold and audacious. Cautious is the word
- Continuing macro gyrations from China to the Middle East show no signs of abating
With investors suddenly taking note of the market with S&P 3,000, significant resistance coming into play that will take awhile to sort through and the aforementioned catalysts towards volatility, the markets will go through a grinding process for the remainder of summer.
The good news is that once that grinding process is finished, there will be enough momentum off the 3,000 level to create a slingshot effect for the overall market. Past September, there is a significant chance the markets go into overdrive on the upside.
S&P 3,100? Nope.
S&P 3,300? Too conservative.
Think S&P 3,500 plus by year end, making 2019 one of the best years ever for U.S. equities. That's the power of moving through this level and the slingshot effect that will take place as a result. That's also the power of a blowoff that forces the hands of the masses of investors who are misallocated into fixed income and other investments yielding at or near zero.
While the thought of 500 point move in the S&P 500 may seem insane to some, given the current pervasive bearishness, chronic misallocation and inordinately low interest rates in the face of what is a healthier economy than most anybody suspects, a 500 point move is not only far from insane but well within the realm of significant probability into the end of 2019.
Given the overall tendency towards outcomes that have been outliers in the economy in recent years, it's time for investors to begin expanding what they deem as normal for price behavior across assets, most certainly in equities and definitely in interest rates, as well.
The next few years will witness some unprecedented volatility across the board. The move that the S&P 500 sees past summer will be act one of the protagonistic phase of the markets within the expanded volatility regime.
Enjoy the show.
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