Trading Action Repeating Itself—What
the Stock Market’s Setting Itself up for

Trading action seems to be repeating itself. What is the stock market setting itself up for?While the price of gold and price of silver continue to be very strong, a lot of gold stocks and silver stocks have been pulling back in price. It’s a reflection of the current state of things, with investor sentiment seemingly stuck in a rut. We’re in a market with so much uncertainty that any call is valid and all outcomes are plausible. The stock market could completely fall apart, stay the same, or advance. A market malaise has set in and it’s almost entirely due to the sovereign debt situation.

Just last week, stocks were looking set for a decent run, as corporate earnings mostly impressed the Street. That rally fizzled pretty quickly and now the S&P 500 Index is back down at the 1,300 level, which I view as problematic in terms of the market’s overall health. What’s happening is that investors are beginning to ignore good news and event-driven trades don’t seem to have any legs. It’s a strong signal that the market is tired and very unsure of itself.

With this backdrop, there certainly is no rush to take action on the long side. Even if the sovereign debt issue were to be settled right now and the market were to make a big advance, there’s just as much probability that it would pull back a month from now on lackluster economic news. The equity market sure isn’t making it easy for traders.

The S&P 500 Index has basically been trading range-bound since the beginning of the year with declining volume. Oddly, it’s following a very similar trading pattern to the beginning of last year where stocks advanced and then didn’t do anything for about 10 months before breaking out. We could be in for a similar scenario this year where stocks might not experience any material rally until sometime in the fourth quarter. That is my current figuring.

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While corporate earnings are strong, economic data are not. Last year—and so far this year—the stock market was held together by good corporate earnings, as investors were willing to wait for the economy to recover. The pace of that recovery is most certainly unclear and the marketplace is growing impatient. Couple this with all the problems associated with country debt and deficits, and you could easily make the case for an S&P below 1,300.

I think we’re going to get continued range-bound trading for the next several months with the potential for an end-of-year rally based on the expectation for good fourth-quarter numbers. Corporations are doing their part; now it’s time for the economy and policymakers to do theirs.