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Lackluster Day in the Market

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As we move toward year-end, many of the institutional players seem to have packed it up for the year. Volume has picked up above and has been above the moving average for the past few sessions, but the price action has been sloppy.

What we saw in the “sell off” that many of the talking heads on TV were jawing over was really just a simple pull back to the 34-day moving average then a bit of a bounce higher today. This has happened multiple times since March and seems to be just a consolidation of the big run. To me, it feels a whole lot like what we saw in the June/July consolidation before the next big leg higher.

All summer long, we heard from the perma-bears in the market that were under-invested and did not get into the rally in the March lows like we wrote was a significant turning point. They kept saying that we were due to move back to the March lows, but the charts kept telling us that the underlying sentiment was supportive higher prices in spite of sketchy fundamentals.

Today, we still hear a lot about the market heading back to the March lows. However, much about the economy is better than it was this summer. Clearly it is not great, but as time goes by we are getting more and more reports of improved corporate earnings.

There are always two parts to the stock market: earnings and valuation. For the last several months we’ve had a valuation expansion as P/E’s have expanded to current above average levels (the P increased while the E was increasing at a lesser pace). In coming months, we will probably see P/E’s peak or begin to contract as the P moves into a trading range and the E continues to improve – this is the scenario where prices anticipate earnings, then plateau while earnings catch up to the price move.

I don’t anticipate a big move down to March lows, but I could easily see a sideways consolidation in prices for a few months while investors wait for the economy to continue to improve and earnings to continue to move up.

The chart shows that the uptrend is still in tact, but we will continue to watch it as sentiment seems to be softening. You can see that many of the indicators we follow on the graph have moved lower in recent weeks. They aren’t indicating a crash or anything like that, but they can easily be interpreted to show weak support for the market in the near-term – which gives me the feeling we will consolidate in a range for awhile.

Mark